15) Why is it unlikely that tax increases will be the way to eliminate current U.S. federal budget
deficits?
A) Increasing every worker’s taxes by the same amount could eliminate the deficit, but it is likely
this action would be viewed as too burdensome for workers with modest incomes.
B) The revenues generated by increasing taxes on the rich would only pay for a small portion of
the federal budget deficit in any recent year.
C) Since World War II, on average when taxes were increased by a dollar, federal government
spending increased by that much and more.
D) all of the above
16) The largest expenditure component of the federal budget is spending on
A) the military.
B) entitlement programs.
C) public education.
D) foreign aid.
17) Government programs such as Social Security or Medicare are examples of
A) discretionary spending.
B) controllable expenditures.
C) entitlements.
D) automatic stabilizers.
18) In the long run, what effect does a government’s deficit spending have on equilibrium real
Gross Domestic Product (GDP)?
A) Government deficit spending will increase equilibrium real Gross Domestic Product (GDP).
B) Deficit spending will decrease the nation’s equilibrium real Gross Domestic Product (GDP).
C) Higher government deficits will not raise equilibrium Gross Domestic Product (GDP) above
the full-employment level.
D) Higher government deficits will raise equilibrium Gross Domestic Product (GDP) above the
full-employment level and also have an inflationary effect.
19) In the long run, a higher government deficit does NOT affect equilibrium real Gross
Domestic Product (GDP), so that continuous increases in the government deficit will
A) lead to greater tax revenues.
B) reduce the price level.
C) reduce spending on privately provided goods and services.
D) increase the unemployment rate.
20) In the long run, a higher government budget deficit causes
A) a decrease in both private spending and equilibrium real GDP.
B) an increase in both private spending and equilibrium real GDP.
C) a decrease in private spending while equilibrium real GDP remains unchanged.
D) no change in private spending but a decrease in equilibrium real GDP.
21) When analyzing the effects of the government budget deficit
A) no distinction must be made between an economy where full employment exists and one
where substantial unemployment exists.
B) it is important to examine the effects of the reported capital budget and the reported operating
budget separately.
C) there should be a comparison of the effect of the deficit to the effects of higher taxes needed
to eliminate it.
D) the baseline budget should be used since it is the most accurate.
22) In the short run, a fiscal policy action that results in a reduction in the size of the budget
deficit will cause
A) an increase in real GDP with stable prices if the economy was below full employment.
B) a reduction in real GDP with falling prices if the economy was below or at full employment.
C) an inflationary gap if the economy was initially operating at full employment.
D) an inflationary gap if the economy was initially operating below full employment.
23) Suppose the economy is initially experiencing a recessionary gap. An increase in the size of
the budget deficit will
A) increase the size of the recessionary gap.
B) reduce the size of the recessionary gap.
C) lead to an increase in prices with no increase in real GDP.
D) lead to a decrease in prices with an increase in real GDP.
24) Suppose the economy is initially operating at full employment. A reduction in the size of the
budget deficit will cause which of the following in the short run?
A) a recessionary gap.
B) an increase the price level and a reduction in real GDP.
C) an increase in the price level with no change in real GDP.
D) an increase in real GDP and an increase in the price level.
25) Suppose the economy is initially operating at full employment. A fiscal policy action that
results in an increase in the size of the budget deficit will cause which of the following in the
long run?
A) an increase in real GDP.
B) have no effect on both the level and composition of real GDP.
C) a reduction in the price level.
D) change the composition of real GDP.
26) In the long run, higher government budget deficits will
A) lead to a redistribution of real GDP from privately produced goods and services to
government produced goods and services.
B) lead to a redistribution of real GDP from government produced goods and services to
privately produced goods and services.
C) cause the price level to go down on government goods but not on private goods.
D) lead to a reduction in the amount of goods and services produced by the government and
private sector.
27) What is the difference between the short run and the long run when there is full employment
and the government engages in deficit spending?
A) Real GDP will increase in both the short run and the long run.
B) Real GDP will increase in the long run but not the short run.
C) Real GDP will increase in the short run but not the long run.
D) Real GDP will not increase in either the long run or the short run.
28) Suppose the economy is initially experiencing a recessionary gap. A reduction in the size of
the budget deficit will cause which of the following in the short run?
A) a reduction in the size of the recessionary gap and increase in real GDP.
B) an increase in the size of the recessionary gap and decrease in real GDP.
C) an increase in inflation and increase in aggregate supply.
D) an inflationary gap.
29) If the economy is experiencing an inflationary gap, an increase in the budget surplus
A) will reduce the size of the inflationary gap.
B) will increase the size of the inflationary gap.
C) will cause an increase in inflation and increase aggregate supply.
D) will increase aggregate demand and will increase the price level.
30) Suppose the economy is initially operating at full employment. A reduction in the size of the
budget deficit will cause which of the following in the long run?
A) a recessionary gap
B) a reduction in real GDP
C) an inflationary gap
D) none of the above
31) The long-run effect of increasing government budget deficits includes
A) a redistribution of output from privately provided goods to government provided goods.
B) no change in equilibrium real GDP.
C) an increase in the price level.
D) all of the above.
32) What are the macroeconomic consequences of a budget deficit when the economy is
operating at full employment? Be sure to discuss the effects in the short-run and in the long-run.
14.4 How Could the Government Reduce All of Its Red Ink?
1) Today, U.S. government spending on entitlements represents ________ of the total federal
budget.
A) about 10 percent
B) less than 25 percent
C) nearly 70 percent
D) nearly 100 percent
2) Which is the fastest growing component of the federal government budget?
A) spending on the military and the war on terrorism
B) spending to improve the nation’s public education
C) spending to improve and expand the nation’s infrastructure
D) spending on entitlements
3) The largest component of U.S. federal spending that contributes to the U.S. government
budget deficit is
A) entitlements.
B) military spending.
C) interest expenses.
D) salaries of government employees.
4) Which of the following has NOT been proposed as a possible economic solution to reducing
the government deficit?
A) reducing expenditures
B) increasing taxes for the rich
C) increasing the number of entitlements
D) increasing taxes for everyone
5) As a possible approach to eliminating the government budget deficit, increasing taxes for
everyone would
A) mean only a small increase in taxes.
B) lead to an inflationary gap.
C) transfer more goods and services to the government sector.
D) lead to a large increase in taxes for every worker.
6) As a possible approach to eliminating the government budget deficit, increasing taxes on the
rich only would
A) lead to a significant increase in tax revenues.
B) not lead to a significant increase in tax revenues.
C) lead to a greater number of entitlements.
D) lead to an increase in real GDP.
7) An entitlement is
A) government spending on things like military salaries.
B) guaranteed benefits under some government programs.
C) another word for a government budget surplus.
D) the payments to the private sector in exchange for goods and services.
8) Legislated federal government payments that anyone who qualifies can receive are called
A) controllable expenditures.
B) a fiscal stabilizer.
C) balanced expenditures.
D) entitlements.
9) Which of the following is NOT an entitlement?
A) Medicaid
B) Social Security
C) salaries of government employees
D) Medicare
10) Among economists, it is generally believed that
A) the federal budget deficit will be eliminated within 10 years.
B) the public debt will be paid off within 10 years.
C) entitlement spending will continue to decline.
D) the federal government will find it difficult to cut entitlement programs.
11) Government spending that changes automatically without action by Congress is
A) a noncontrollable expenditure.
B) national defense.
C) payments to contractors for routing services performed.
D) discretionary payments.
12) The part of the federal budget that has increased at the fastest rate is
A) national defense.
B) interest payments.
C) entitlements.
D) government salaries.
13) Noncontrollable expenditures are called “noncontrollable” because
A) they increase at the same rate as the public debt.
B) they change without congressional action.
C) only the president can approve these entitlement payments.
D) the political process determines the size of the payments.
14) All of the following are noncontrollable government expenditures EXCEPT
A) Social Security.
B) national defense spending.
C) Medicare.
D) unemployment benefits.
15) Politicians have suggested that the budget deficit could be reduced by
A) increasing taxes and reducing expenditures.
B) lowering the interest rates.
C) imposing higher tariffs on imported goods.
D) forbidding interest payments on government bonds outsourcing.
16) Which government program would be considered an “entitlement” program?
A) national defense
B) subsidies for mass transportation
C) law enforcement in major U.S. cities
D) Social Security
17) The fastest growing component of the annual federal budgets since 2000 is
A) the education budget.
B) entitlement payments.
C) funding for health research.
D) interest payments on government debt.
18) Which of the following statements is CORRECT?
A) Since the mid-1940s, expenditures on national defense have increased considerably as a
percentage of total federal government spending.
B) Since the mid-1940s, expenditures on income security and health programs have increased
considerably as a percentage of total federal government spending.
C) Taken together, expenditures on national defense and on income security and health programs
now account for less than half of all federal government spending.
D) Expenditures on national defense now account for more than twice as much federal
government spending as expenditures on income security and health programs.
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19) By approximately how much would the federal government have to raise each worker’s
annual taxes to eliminate the current federal budget deficit?
A) between $50 and $100 per year
B) about $50,000 per year
C) between $50,000 and $100,000 per year
D) about $4,000 per year