File: Chapter 31 Deficits and Debt: The Austerity Debate
True/False
[QUESTION]
1. A government budget deficit occurs when government revenues exceed government
expenditures.
2. Economists who focus on fiscal austerity focus on the short-run.
3. In several years, bondholders may lose confidence in the United States willingness to pay back
funds.
4. Evidence shows the United States can continue its expansionary fiscal policies without causing
a new financial crisis.
5. Budget deficits contribute to higher debt.
6. Over the past five years, most countries’ debt–to-GDP ratios have risen as a result of the global
recession.
7. If Japan’s debt level is much higher than that of the United States, the United States has more
flexibility to run deficits.
8. Much of the U.S. debt is held internally.
9. The portion of the budget deficit or surplus that would exist even if the economy were at its
potential income is called the cyclical deficit or cyclical surplus.
10. Economists believe that an increase in equilibrium income can eliminate a cyclical deficit but
cannot eliminate a structural deficit.
11. The real deficit is the nominal deficit adjusted for inflation’s effect on existing debt.
12. The larger the debt and the inflation rate, the less debt will be eliminated by inflation.
13. A country that is running a budget surplus will not be in debt.
14. Countries with larger debts in terms of absolute value are worse off than countries with smaller
debts.
15. In the short-run framework, budget deficits should:
A. never be run since they slow economic growth over the long run.
B. never be run since they crowd out investment in the short run.
C. be run on a temporary basis whenever the economy is below potential output.
D. be run on a permanent basis since they can always be financed by printing money.
16. In the long-run framework, budget surpluses:
A. should be run whenever output dips below potential output.
B. should never be run since they crowd out investment in the short run.
C. are better than budget deficits over the long run because unlike budget deficits, they increase
saving and investment.
D. should be run on a permanent basis since they boost saving and investment and stimulate
economic growth.
17. In the long-run framework, deficits reduce:
A. investment.
B. government consumption.
C. taxes.
D. subsidies.
18. Deficits may be desirable in the short run if they:
A. help to stabilize the economy when the economy falls below potential output.
B. increase savings necessary for future investment and growth.
C. increase savings necessary for future consumption and demand.
D. help to stabilize the economy when the economy is above potential output.
19. A budget deficit is defined as:
A. a shortfall of revenues compared to expenditures.
B. a shortfall of expenditures compared to revenue.
C. accumulated deficits minus accumulated surpluses.
D. accumulated surpluses minus accumulated deficits.
20. A budget surplus is defined as:
A. a shortfall of revenues compared to expenditures.
B. a shortfall of expenditures compared to revenue.
C. accumulated deficits minus accumulated surpluses.
D. accumulated surpluses minus accumulated deficits.
21. Economists who focus on the need for fiscal austerity tend to focus on
A. the long run
B. the short run
C. both the short run and the long run
D. neither the short run or the long run
22. A policy of fiscal austerity could have difficulty lowering the debt-to-GDP ratio because it
might:
A. lower potential output and government spending.
B. raise both GDP and government revenue.
C. lower both GDP growth and government revenue.
D. raise potential output and government spending.
23. When the government runs a deficit, it will:
A. buy bonds to finance the deficit.
B. sell bonds to finance the deficit.
C. reduce the money supply to finance the deficit.
D. raise taxes immediately.
24. A government can finance its budget deficit by doing all of the following except:
A. buying bonds.
B. borrowing from its central bank.
C. selling bonds.
D. printing money.
25. The budget deficit or surplus is:
A. well defined and straightforward to measure.
B. well defined but frequently distorted by creative but improper accounting practices.
C. difficult to measure and can be defined legitimately in several ways.
D. so arbitrarily defined that it is meaningless.
26. Deficits and surpluses are best viewed as:
A. comprehensive measures of government’s budget.
B. a summary measure of a nation’s fiscal policy.
C. a summary measure of the financial health of the economy.
D. a summary measure of a nation’s monetary policy.
27. The budget deficit or surplus is:
A. easy to calculate since there is only one valid method for computing it.
B. hard to calculate even though there is only one valid method for computing it.
C. hard to calculate since economists disagree on how it should be computed.
D. easy to calculate since economists agree on how it should be computed.
28. A cyclical deficit is the portion of the deficit that exists when:
A. the economy is at potential income.
B. the economy is below potential income.
C. inflation is not fully anticipated.
D. inflation is fully anticipated.
29. If an economy operates below potential income, the actual deficit is:
A. smaller than the structural deficit.
B. larger than the structural deficit.
C. the same as the structural deficit.
D. comparable to the structural deficit.
30. The structural deficit:
A. rises as the economy expands and falls when it contracts.
B. falls as the economy expands and rises when it contracts.
C. changes as actual income changes regardless of potential income.
D. does not change when income changes, but changes only when potential income changes.
31. Compared to the predictions of the standard AS/AD model, the structural stagnation model
implies that the:
A. structural deficit is higher.
B. cyclical deficit is higher.
C. frictional deficit is lower.
D. potential deficit is lower.
32. The cyclical deficit:
A. is not affected by changes in actual income or potential income.
B. rises as the economy expands and falls as the economy contracts.
C. is the deficit that exists if the economy is at potential income.
D. rises as the economy moves below potential output.
33. If taxes and government expenditures were constant and did not vary with income, then:
A. cyclical deficits would increase.
B. cyclical deficits would not exist.
C. structural deficits would increase.
D. structural deficits would not exist.
34. If income falls below its potential and the income tax rate is reduced, this will:
A. raise both the cyclical and structural deficits.
B. raise the cyclical deficit but reduce the structural deficit.
C. reduce the cyclical deficit but raise the structural deficit.
D. reduce both the cyclical and structural deficits.
35. If a cyclical surplus exists, the economy must be:
A. at potential income.
B. above potential income.
C. below potential income.
D. experiencing deflation.
36. When the economy is operating close to potential, the budget deficit experienced is:
A. primarily cyclical.
B. primarily structural.
C. neither structural nor cyclical.
D. about evenly split between structural and cyclical.
37. During World War II, the economic boom that raised U.S. equilibrium income above potential
income:
A. increased the structural deficit.
B. eliminated any structural deficit.
C. increased the cyclical deficit.
D. eliminated any cyclical deficit.
38. If actual income is $300 billion, potential income is $350 billion, the total deficit is $20 billion,
and tax revenue increases with income, then the structural deficit can be any of the following
except:
A. zero.
B. $1 billion.
C. $10 billion.
D. $20 billion.
39. If actual income is $300 billion, potential income is $350 billion, the total surplus is $20
billion, and tax revenue increases with income, then the cyclical deficit can be any of the following
except:
A. zero.
B. $1 billion.
C. $10 billion.
D. $20 billion.
40. Suppose potential income is $60 billion, actual income is $40 billion, and expenditures don’t
vary with income. If the actual budget deficit is $4 billion and the marginal tax rate is 20 percent,
the cyclical deficit:
A. is zero.
B. is between zero and $4 billion.
C. is $4 billion.
D. cannot be determined from the given information.
41. Suppose potential income is $60 billion, actual income is $40 billion, and expenditures don’t
vary with income. If the actual budget deficit is $4 billion and the marginal tax rate is 20 percent,
the structural deficit:
A. is zero.
B. is between zero and $4 billion.
C. is $4 billion.
D. cannot be determined from the given information.
42. If an economy is operating at potential output:
A. any surplus would be a cyclical surplus.
B. any surplus would be a structural surplus.
C. a budget surplus is impossible.
D. the budget must be in surplus.
43. Say the economy is at its potential income at $8 trillion and the deficit is $200 billion. The
structural deficit:
A. is $200 billion.
B. could be less than $200 billion.
C. could be more than $200 billion.
D. cannot be determined from the given information.
44. Policymakers generally are:
A. more concerned about structural deficits than cyclical deficits.
B. equally concerned about structural and cyclical deficits.
C. more concerned about cyclical deficits than structural deficits.
D. not concerned about structural or cyclical deficits.
45. Suppose that the economy has a structural deficit of $100 billion and a budget deficit of $100
billion. It follows that output:
A. must equal potential output.
B. must be above potential output.
C. must be below its potential output.
D. could be at, above, or below potential output.
46. Suppose that the economy has a structural deficit of $200 billion and a budget deficit of $100
billion. It follows that output:
A. must equal potential output.
B. must be above potential output.
C. must be below its potential output.
D. could be at, above, or below potential output.
47. Suppose that the economy has a structural deficit of $200 billion but is running a budget
surplus. It follows that:
A. there is no cyclical deficit or surplus.
B. there is a cyclical surplus.
C. there is a cyclical deficit.
D. the cyclical deficit cannot be determined without more information.
48. Suppose that the economy has a structural deficit of $200 billion and is also running a budget
deficit. It follows that:
A. there is no cyclical deficit or surplus.
B. there is a cyclical surplus.
C. there is a cyclical deficit.
D. the cyclical deficit or surplus cannot be determined without more information.
49. Suppose that the economy has a structural deficit of $200 billion and is operating above
potential output. From this we can infer that the budget as a whole:
A. is in deficit.
B. is balanced.
C. is in surplus.
D. could be in deficit, in surplus, or balanced.
50. Suppose that the economy has a structural surplus of $100 billion and is operating above
potential output. From this we can infer that the budget as a whole:
A. is in deficit.
B. is balanced.
C. is in surplus.
D. could be in deficit or surplus depending on the size of the cyclical deficit.
51. The government decides to increase its expenditures by $250. The multiplier in this economy
is 4 and the tax rate is 22 percent. The net effect of this expansionary fiscal policy is to:
A. increase the budget deficit by $30.
B. increase the budget deficit by $220.
C. decrease the budget deficit by $30.
D. decrease the budget deficit by $220.
52. The government decides to reduce its expenditure by $250. The multiplier in this economy is 4
and the tax rate is 22 percent. The net effect of this contractionary fiscal policy is to:
A. increase the budget deficit by $30.
B. increase the budget deficit by $220.
C. decrease the budget deficit by $30.
D. decrease the budget deficit by $220.
53. During World War II, the economic recession that reduced equilibrium income below
potential income in most European countries:
A. increased the structural deficit.
B. eliminated any structural deficit.
C. increased the cyclical deficit.
D. eliminated any cyclical deficit.
54. The cyclical deficit is $400 billion, potential output is $9 trillion and the tax rate is 16 percent.
With this information, we can infer that the actual output of this economy is:
A. $6 trillion.
B. $11.5 trillion.
C. $6.5 trillion.
D. $9 trillion.
55. The cyclical surplus is $450 billion, potential output is $10 trillion and tax rate is 15 percent.
With this information, we can infer that the actual output of this economy is:
A. $13 trillion.
B. $13.5 trillion.
C. $6 trillion.
D. $6.5 trillion.
56. If an economy is $100 billion below potential, the tax rate is 20 percent, and the deficit is $180
billion, the structural deficit is:
A. $20 billion.
B. $160 billion.
C. $180 billion.
D. $200 billion.
57. The nominal deficit depends primarily on:
A. government’s expenditures and receipts.
B. the rate of inflation.
C. the difference between potential and actual output.
D. the debt.
58. A decrease the nominal deficit can be caused by an increase in:
A. taxes
B. government expenditures
C. interest rates
D. the debt
59. The real deficit depends on the:
A. level of government expenditures and receipts only.
B. rate of inflation only.
C. nominal deficit, the rate of inflation, and the government debt.
D. rate of interest only.
60. In the formula to calculate the real deficit, which of the following increases the real deficit?
A. A smaller nominal deficit
B. A lower interest rate
C. A larger debt
D. A lower inflation rate
61. In the formula to calculate the real deficit, which of the following decreases the real deficit?
A. A larger nominal deficit
B. Aa higher interest rate
C. A larger debt
D. A lower inflation rate
62. The real deficit is the nominal deficit adjusted for changes in:
A. interest rates.
B. potential output.
C. output.
D. the general price level.
63. In order to calculate the real deficit, economists need to know the:
A. nominal deficit and the rate of inflation.
B. rate of inflation and the debt.
C. rate of inflation, the debt, and the nominal deficit.
D. rate of inflation, the debt, and the real interest rate.