64. Holding the nominal deficit, nominal interest rate, and total debt constant, an increase in the
inflation rate will:
A. not affect the real deficit.
B. raise the real deficit.
C. lower the real deficit.
D. either raise or lower the real deficit depending on the real interest rate.
65. If the U.S. inflation rate increases unexpectedly and government revenues, expenditures, and
nominal interest rates remain unchanged:
A. both the U.S real and nominal budget deficits increases.
B. only the U.S. real budget deficit increases.
C. only the U.S. real budget deficit decreases.
D. both the U.S. real and nominal budget deficits decreases.
66. Which of the following statements gives the correct definition of the real deficit?
A. Real deficit = Nominal deficit + (inflation × total debt)
B. Real deficit = Nominal deficit + (total debt/inflation)
C. Real deficit = Nominal deficit – (total debt/inflation)
D. Real deficit = Nominal deficit –– (inflation × total debt)
67. An unanticipated increase in the inflation rate will most likely:
A. either increase or decrease the real value of the national debt, depending on the effect of
inflation on capital gains and losses.
B. increase the real value of the national debt.
C. transfer real wealth from bondholders to the government.
D. have no effect on the real value of the national debt.
68. If the nominal deficit is $100 billion, inflation is 10 percent, and total debt is $2 trillion, then
the real deficit is:
A. -$20 billion (a surplus).
B. -$100 billion (a surplus).
C. $20 billion.
D. $100 billion.
69. If the nominal deficit is $200 billion, the real deficit is $180 billion, and total debt is $2 trillion,
then inflation is:
A. 1 percent.
B. 2.5 percent.
C. 4 percent.
D. 5 percent.
70. If the real deficit is $100 billion, the inflation rate is 10 percent, and the nominal deficit is $400
billion, then the debt is:
A. $1 trillion.
B. $2 trillion.
C. $3 trillion.
D. $4 trillion.
71. If the real deficit is $200 billion, the inflation rate is 5 percent, and the debt is $3 trillion, then
the nominal deficit is:
A. $100 billion.
B. $250 billion.
C. $300 billion.
D. $350 billion.
72. If the nominal deficit is $300 billion, inflation is 10 percent, and total debt is $2 trillion, then
the real deficit is equal to:
A. -$20 billion.
B. -$100 billion.
C. $20 billion.
D. $100 billion.
73. If the nominal deficit is $200 billion, the real deficit is $150 billion, and total debt is $2 trillion,
then inflation is:
A. 1 percent.
B. 2.5 percent.
C. 4 percent.
D. 5 percent.
74. If the real deficit is $100 billion, the inflation rate is 7.5 percent, and the nominal deficit is
$400 billion, then total debt is:
A. $1 trillion.
B. $2 trillion.
C. $3 trillion.
D. $4 trillion.
75. If the real deficit is $200 billion, the inflation rate is 2.5 percent, and total debt is $2 trillion,
then the nominal deficit is:
A. $100 billion.
B. $250 billion.
C. $300 billion.
D. $350 billion.
76. If inflation is correctly anticipated, those who buy government bonds will:
A. suffer losses regardless of inflation because interest paid on government bonds is set by
Congress.
B. not suffer losses because inflation does not affect the purchasing power.
C. suffer losses because they will be compensated by lower interest payments.
D. not suffer losses because they will be compensated by higher interest payments.
77. Bond holders:
A. lose when actual inflation equals expected inflation.
B. gain when actual inflation is more than was expected.
C. do not lose when the expected inflation built into the nominal interest rate is correct.
D. do not lose when the expected inflation built into the nominal interest rate is lower than actual
inflation.
78. All other things equal, the real surplus:
A. falls as inflation increases.
B. is not affected by inflation.
C. rises as inflation increases.
D. may rise or fall as inflation increases depending on the level of debt.
79. The real deficit is $180 billion; inflation is 4 percent; total debt is $4.5 trillion. The nominal
deficit is:
A. zero.
B. $1 billion.
C. $180 billion.
D. $360 billion.
80. Government debt is defined as:
A. a shortfall of incoming revenue under outgoing payment.
B. a shortfall of outgoing payments under incoming revenue.
C. accumulated deficits minus accumulated surpluses.
D. accumulated deficits plus accumulated surpluses.
81. If government has no debt initially but then has annual revenues of $1.5 billion for 10 years
and annual expenditures of $1.6 billion for 10 years, then the government has a:
A. deficit of $100 million per year and a debt of $1 billion.
B. surplus of $100 million per year and a debt of $1 billion.
C. deficit of $100 million and a debt of $1 billion per year.
D. surplus of $100 million and a debt of $1 billion per year.
82. If government has no debt initially but then annual revenues are $8 billion for 10 years while
annual expenditures are $11 billion for 10 years, then the government has a:
A. deficit of $3 billion per year and a debt of $30 billion.
B. surplus of $3 billion per year and a debt of $30 billion.
C. deficit of $30 billion and a debt of $3 billion per year.
D. surplus of $30 billion and a debt of $3 billion per year.
83. Use the following table to determine which statement is true.
A. The budget deficit in 1950 was $2.3 billion.
B. From 1946 to 1950, the U.S. debt was $2.3 billion.
C. From 1945 to 1950, the debt rose by $2.3 billion.
D. In 1950, the U.S. debt was $2.3 billion.
84. Use the following table to determine which statement is true.
A. In 1946 and 1950, the budget was in deficit while from 1948 to 1949, the budget was in surplus.
B. In 1946 and 1950, the budget was in surplus while from 1948 to 1949, the budget was in deficit.
C. The debt rose each year from 1946 to 1950.
D. The debt fell from 1946 to 1950.
85. Which of the following statements is true?
A. The debt is a flow measure and the deficit or surplus is a stock measure.
B. Both the debt and the deficit or surplus are flow measures.
C. Both the debt and the deficit or surplus are stock measures.
D. The debt is a stock measure and the deficit or surplus is a flow measure.
86. If the national debt increases in any given year, it follows that the government:
A. sold bonds in that year to finance a budget surplus.
B. bought bonds in that year to finance a budget surplus.
C. sold bonds in that year to finance a budget deficit.
D. bought bonds in that year to finance a budget deficit.
87. If the federal government has a budget surplus in a given year, the national debt will:
A. decrease.
B. remain constant.
C. increase only if output is below potential output.
D. increase.
88. If the debt of the federal government increases by $10 billion in one year the budget:
A. deficit in that year must be $10 billion.
B. surplus in that year must be $10 billion.
C. deficit in that year increased by $10 billion.
D. surplus in that year decreased by $10 billion.
89. If the debt of the federal government decreases by $20 billion in one year the budget:
A. deficit in that year must be $20 billion.
B. surplus in that year must be $20 billion.
C. deficit in that year decreases by $20 billion.
D. surplus in that year increases by $20 billion.
90. Debt is measured relative to GDP because:
A. the ability of a country to pay off its debt depends on its productive capacity.
B. the ability to produce output depends on the size of the nation’s debt.
C. GDP is always used as a reference point in economics.
D. as long as this ratio remains high, the government will have no trouble repaying the debt.
91. GDP provides an indication of:
A. how much interest will have to be paid on the national debt.
B. how big a national debt a country can handle.
C. the inflation-adjusted burden of a country’s debt.
D. how much of a country’s debt is external rather than internal.
92. Deficits and debt are often measured relative to GDP because:
A. this method always makes them appear smaller.
B. this method always makes them appear larger.
C. the government’s ability to repay the debt depends on GDP.
D. the growth in GDP depends on the debt.
93. Debt needs to be judged relative to assets because:
A. private investment is always more productive than government investment.
B. all assets provide interest payments to pay the debt.
C. assets can increase the ability of a country to repay a debt.
D. assets are always depreciating.
94. Which of the following holds the most U.S. government debt?
A. U.S. government agencies not including Social Security
B. The Federal Reserve
C. Social Security
D. Foreigners and U.S. citizens
95. Which of the following statements about government debt is false?
A. Government has the power to tax to finance its debt.
B. Government can create money to finance its debt.
C. Most U.S. government debt is owned by foreigners.
D. Almost half of U.S. government debt is internal to the government.
96. Which of the following is a reason why government debt is different from individual debt?
A. Government has fewer sources of income to finance its debt than individuals.
B. Government can create money to finance its debt.
C. Government debt can be owed to foreigners, unlike the debt of individuals.
D. Government debt must be repaid at some point in time.
97. Which of the following is a reason why government debt is different from individual debt?
A. Government has fewer sources of income to finance its debt than individuals.
B. Government cannot create money to finance its debt.
C. Government debt can be owed to foreigners, unlike the debt of individuals.
D. Government is ongoing, individuals are not.
98. In what way is government debt like individual debt?
A. Much of government debt is owed to its own citizens.
B. Government can pay its debt by printing money.
C. Inflation reduces the real value of both types of debt.
D. Government never has to pay back its debt.
99. One of the reasons government debt is different from individual debt is:
A. government does not pay interest on its debt.
B. government never really needs to pay back its debt.
C. all government debt is owed to other government agencies.
D. the government debt is unrelated to income.
100. External government debt is:
A. government debt owed to its own citizens.
B. government debt owed to individuals in foreign countries.
C. government debt owed by one branch of the government to another.
D. debt that individuals in foreign countries owe to the U.S. government.
101. Government debt held by citizens of a country is:
A. more like an individual’s debt because paying interest on it involves a net reduction in domestic
income.
B. more like an individual’s debt because paying interest on it involves no net reduction in
domestic income.
C. less like an individual’s debt because paying interest on it involves a net reduction in domestic
income.
D. less like an individual’s debt because paying interest on it involves no net reduction in domestic
income.
102. Paying interest on external government debt rather than on domestic debt produces:
A. a net reduction in domestic income.
B. a redistribution of income within the country.
C. a net increase in domestic income.
D. no change in the level or distribution of domestic income.
103. Paying interest on internal government debt involves a:
A. net reduction in domestic income.
B. redistribution of income among citizens of the country.
C. net increase in domestic income.
D. redistribution of income to citizens of other countries.
104. External debt rises from 5 percent of GDP to over 30 percent of GDP. This increase in
external debt:
A. is not a potential problem because repayment does not imply a net reduction in the income of an
average citizen.
B. is not a potential problem because government debt differs from the debt of individuals.
C. is a potential problem because government debt is no different from the debt of individuals.
D. is a potential problem because repayment implies a net reduction in the income of an average
citizen.
105. If the total debt of the United States is $15 billion and the amount of government debt held by
private investors is $6 trillion. The difference between these two is debt:
A. held by U.S. financial institutions.
B. held by foreigners.
C. held by some parts of the government itself.
D. that has been adjusted for the effects of inflation.
106. U.S. government debt as a percentage of GDP has been:
A. falling steadily since World War II.
B. increasing steadily since World War II.
C. fluctuating since World War II.
D. unchanged since World War II.
107. According to some economists, when a country’s debt–to-GDP ratio exceeds 90 percent:
A. the interest rate will fall, reducing debt service payments.
B. the government will have to purchase more long-term securities.
C. it will compel citizens to buy more U.S. debt.
D. the government will face financial instability
108. When the U.S. debt-to-GDP ratio has fallen, it has generally been because:
A. the budget deficit fell.
B. the budget deficit rose.
C. income fell.
D. income rose.
109. A constant debt-to-GDP ratio in a growing economy is consistent with a:
A. continual surplus.
B. continual deficit.
C. balanced budget.
D. falling level of total debt.
110. What makes it possible for a country to maintain a constant debt-to-GDP ratio and still have
continual deficits is:
A. positive private savings.
B. trade surpluses.
C. continual inflation.
D. real economic growth.
111. The United States is a net borrower. If its budget deficits rise faster than GDP, the national
debt will:
A. increase in terms of dollars but decrease as a percentage of GDP.
B. increase both in terms of dollars and as a percentage of GDP.
C. decrease in terms of dollars but increase as a percentage of GDP.
D. decrease both in terms of dollars and as a percentage of GDP.
112. An increase in the U.S. national debt would be:
A. unsustainable under any circumstances.
B. unsustainable if U.S. GDP grew at a faster rate than the debt.
C. unsustainable if U.S. GDP grew at a slower rate than the debt.
D. sustainable under any circumstances.
113. If a $10 trillion economy is growing at a real rate of 2.5 percent a year, what must this
economy do to maintain a constant debt-to-GDP ratio?
A. run increasingly larger surpluses
B. maintain a balanced budget
C. have increasingly smaller deficits
D. have increasingly larger deficits
114. If a $6 billion economy is growing at a real rate of 5 percent a year and there is no inflation,
what must the government do to maintain a constant debt-to-GDP ratio?
A. Run a surplus of $300 million
B. Balance the budget
C. Run a deficit of $300 million
D. Run a deficit of $600 million
. Debt service refers to:
A. how much debt a country incurs each year.
B. the interest rate a country pays on its debt.
C. the fraction of a country’s debt that becomes due each year.
D. the interest payments a country makes on its debt each year.
116. As the interest rate rises, debt service:
A. decreases.
B. does not change, but debt increases.
C. increases.
D. does not change and neither does the debt.
117. Debt service payments by the government:
A. are used to purchase goods and services.
B. are a payment for past expenditures.
C. do not burden the generations that must make them.
D. have fallen continuously since World War II.
118. Interest payments on the government debt depend directly on:
A. returns from government assets.
B. whether debt is owed to citizens or foreigners.
C. current expenditures.
D. past expenditures.