True / False
1. The federal budget deficit in 2009 was more than eight times larger than the deficit in 2007.
a.
True
b.
False
True
Easy
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Issue: Is the Federal Government Budget Deficit too Large?
2. In 2010, many politicians argued that the deficit should be reduced at all costs but many economists countered that
deficit reduction would be problematic given the state of the economy.
a.
True
b.
False
True
Moderate
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Issue: Is the Federal Government Budget Deficit too Large?
3. In 2010 and 2011, President Obama advocated deficit reduction through decreased spending while Republicans in
Congress advocated increased taxation to achieve the same goal.
a.
True
b.
False
False
Moderate
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Issue: Is the Federal Government Budget Deficit too Large?
4. If a balanced budget were required in 2008, the government would have been required to cut spending and increase
taxes.
a.
True
b.
False
True
Moderate
5. Economic principles suggest that we should focus on balancing the budget rather than balancing aggregate supply and
aggregate demand.
a.
True
b.
False
False
Moderate
6. Although a balanced budget may be appropriate under one monetary policy, a deficit or surplus may be appropriate
under a different monetary policy.
a.
True
b.
False
True
Moderate
7. Expansionary fiscal policy normally lowers interest rates.
a.
True
b.
False
False
Easy
8. The budget deficit is the amount by which a government’s expenditures exceed its receipts.
a.
True
b.
False
True
Easy
9. Deficits are created by governments running a large debt.
a.
True
b.
False
False
Moderate
10. In 2010, the net national debt was about $9 trillion or approximately $29,000 per person.
a.
True
b.
False
True
Moderate
11. Like the debt of many families, the national debt in 2014 was many times larger than the national income.
a.
True
b.
False
False
Easy
12. As GDP falls, automatic stabilizers run the federal budget in a deficit direction.
a.
True
b.
False
13. The structural deficit is determined by established expenditure-transfer policies and tax rates and is independent of the
current level of GDP.
a.
True
b.
False
14. At levels of GDP above full employment, the federal budget would usually be in a deficit position.
a.
True
b.
False
15. The structural deficit can be used to estimate the thrust of current fiscal policy.
a.
True
b.
False
16. The actual deficit is a poor measure of the government fiscal policy because it changes independently of intentional
government policies.
a.
True
b.
False
17. The structural deficit is extremely sensitive to the performance of the economy.
a.
True
b.
False
18. The official fiscal year budget deficits disappeared from 1998 to 2001.
a.
True
b.
False
19. Because of the recessions in 1983 and 1991, the structural deficit was far larger than the actual deficit in those years.
a.
True
b.
False
Easy
20. Both Social Security expenditures and the payroll tax receipts that finance them are treated as off-budget items.
a.
True
b.
False
True
Easy
21. In 2009, the Social Security System ran a surplus of approximately $137 billion.
a.
True
b.
False
True
Easy
22. Until 1983, almost all U.S. national debt stemmed from financing wars or from the loss tax revenues that accompany
recession.
a.
True
b.
False
False
Easy
23. In 2010, the debt-to–GDP ratio increased to roughly the same ratio as the 1990s.
a.
True
b.
False
False
Moderate
24. Analogies between public and private debt are usually misleading.
a.
True
b.
False
True
Moderate
25. Since the debt is measured in dollars, the presence of inflation serves to understate the true level of indebtedness.
a.
True
b.
False
False
Easy
26. A constitutional amendment requiring an annually balanced budget would help stabilize the economy.
a.
True
b.
False
False
Moderate
27. It is most likely that the federal government will never actually pay off the national debt.
a.
True
b.
False
True
Easy
28. The share of the net national debt owned by foreign individuals, businesses, and governments has steadily risen to
80%.
a.
True
b.
False
False
Easy
29. The U.S. national debt at the end of 2014 was about $30 trillion.
a.
True
b.
False
False
Moderate
30. Because of the American national debt, future Americans will be burdened by heavy interest payments which will
necessitate higher taxes.
a.
True
b.
False
False
Moderate
31. Monetizing the deficit contributes to the inflationary pressures that are already present in the economy.
a.
True
b.
False
True
Moderate
32. Monetizing the debt is a way of turning debt into money and reducing the burden of the debt.
a.
True
b.
False
False
Moderate
33. If the Federal Reserve takes no countervailing actions, an expansionary fiscal policy will increase the deficit, increase
GDP, increase prices, and drive up interest rates.
a.
True
b.
False
True
Moderate
34. The “crowding out” effect states that government spending pushes up interest rates and reduces private investment
spending.
a.
True
b.
False
True
Easy
35. Deficit spending will not cause much inflation if the economy is operating near full employment.
a.
True
b.
False
False
Moderate
36. If deficit spending causes an increase in economic activity, it may “crowd in” some potential investment spending.
a.
True
b.
False
True
Easy
37. When the economy has substantial additional saving, deficit spending will have a large “crowding out” effect.
a.
True
b.
False
False
Moderate
38. The short-run effects of government’s financial rescue program and fiscal stimulus package helped the economy
increase aggregate demand curing the Great Recession.
a.
True
b.
False
True
Easy
39. When budget deficits take place in a high-employment economy, the effect is an increase in capital stock.
a.
True
b.
False
False
Moderate
40. Contractionary fiscal policies used to reduce the deficit in the 1990s did not hurt the economy because fiscal and
monetary policies were well coordinated at that time.
a.
True
b.
False
True
Moderate
41. Monetary and fiscal policy are primarily tools for long-run economic stabilization.
a.
True
b.
False
False
Moderate
42. The structural deficit does not depend on the state of the economy.
a.
True
b.
False
43. In the long run, aggregate demand controls, no matter what happens to aggregate supply.
a.
True
b.
False
False
Difficult
DISC: Monetary and fiscal policy
United States – BPROG: Reflective Thinking – BPROG: Analysis
Monetary and fiscal policy
Issue Revisited: Is the Budget Deficit Too Large?
Multiple Choice
44. In 2008 and 2009, the budget deficit increased substantially because of
a.
the weak economy.
b.
extraordinary spending.
c.
reduced tax receipts.
d.
all of the above
Easy
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Issue: Is the Federal Government Budget Deficit too Large?
45. In 2009, the U.S. had a budget deficit of approximately
a.
$161 billion.
b.
$459 billion.
c.
$800 billion.
d.
$1.4 trillion.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Issue: Is the Federal Government Budget Deficit too Large?
46. In 2010, which of the following was true regarding the extremely large deficits that the U.S. recently encountered?
a.
Most politicians and economists argued that the deficit had to be reduced.
b.
Most politicians argued that the deficit had to be reduced but economists cautioned against this course of
action.
c.
Most economists argued that the deficit had to be reduced but politicians cautioned against this course of
action.
d.
Both politicians and economist cautioned against deficit reduction.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Issue: Is the Federal Government Budget Deficit too Large?
47. The main goal of fiscal policy should always be to
a.
generate a budget deficit.
b.
balance the budget.
c.
balance C + I with government spending.
d.
balance aggregate demand with aggregate supply.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Should the Budget Always Be Balanced? The Short Run
48. Which of the following is expected to increase aggregate demand in the short run?
a.
Deficit budget
b.
Surplus budget
c.
Zero based budget
d.
Balanced budget
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Should the Budget Always Be Balanced? The Short Run
49. To maintain a balanced budget during the sag in personal spending in 2008 could cause a
a.
further increase in aggregate demand and inflation.
b.
further increase in aggregate demand and unemployment.
c.
further decrease in aggregate demand and a recession.
d.
further decrease in aggregate demand and inflation.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Should the Budget Always Be Balanced? The Short Run
50. The purpose of fiscal policy should be to
a.
balance the budget to be fiscally responsible.
b.
balance aggregate supply and aggregate demand.
c.
keep taxes low to keep voters happy.
d.
minimize government spending to avoid wasting money.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Should the Budget Always Be Balanced? The Short Run
51. If the U.S. government decided to pay off the national debt by creating money, what would be the most likely effect?
a.
a substantial reduction in real GDP
b.
a deflationary collapse
c.
rapid inflation
d.
an increase in the trade surplus
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Should the Budget Always Be Balanced? The Short Run
52. If the U.S. government decides to eliminate a budget surplus by reducing taxes, the most likely effect would be
a.
falling prices.
b.
a reduction in the trade deficit.
c.
an increase in unemployment.
d.
upward pressure on prices.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Should the Budget Always Be Balanced? The Short Run
53. Most economists agree that the focus of fiscal policy is to
a.
plan the economy.
b.
balance aggregate demand and aggregate supply.
c.
balance the federal budget.
d.
balance environmental needs and resources.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Should the Budget Always Be Balanced? The Short Run
54. Appropriate fiscal policy depends on the other major tool of governmental stabilization policy:
a.
trade policy.
b.
tax policy.
c.
monetary policy.
d.
labor market policy.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Should the Budget Always Be Balanced? The Short Run
55. The government should not attempt to balance the budget if
a.
the economy is in a recessionary gap.
b.
actual GDP is below full-employment GDP.
c.
unemployment is rising.
d.
All of the above are correct.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Should the Budget Always Be Balanced? The Short Run
56. Which of the following individuals would be most likely to support a balanced budget amendment to the constitution?
a.
“Christmas is when children ask Santa Claus for things and their parents pay for them. Deficits is when adults
ask government for things and their children pay for them.”-Richard Lamm
b.
“In a boom, inflation can be caused by allowing unlimited credit to support excited enthusiasm of business
speculators. But in a slump government expenditure is the only sure means of obtaining quickly a rising
output.”-J.M. Keynes
c.
“If we face a recession we should not lay off employees. Employees are not guilty; why should they suffer?”-
Akio Morita
d.
“Underbalancing the budget during a depression is not primarily a deliberate policy but a practical necessity.”-
Gunnar Myrdal
DISC: Monetary and fiscal policy
United States – BPROG: Reflective Thinking – BPROG: Analysis
Monetary and fiscal policy
Should the Budget Always Be Balanced? The Short Run
57. If the economy is in a recessionary gap, and the government attempts to balance the budget, the effect will be to
a.
counteract the recession.
b.
worsen and prolong the recession.
c.
end the recession sooner.
d.
increase the level of real GDP.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Should the Budget Always Be Balanced? The Short Run
58. If the economy is in an inflationary gap, and the government attempts to balance the budget, the effect will be to
a.
counteract inflation.
b.
reduce the trade deficit.
c.
continue inflationary pressures.
d.
increase unemployment.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Should the Budget Always Be Balanced? The Short Run
59. Suppose that the economy is currently at full employment. All other things being equal, if central bank implements
contractionary policy, then the appropriate fiscal policy is to
a.
increase taxes.
b.
reduce government spending.
c.
balance the budget.
d.
increase a budget deficit.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Should the Budget Always Be Balanced? The Short Run
60. Japanese Prime Minister Ryutaro Hashimoto was called the “Herbert Hoover of Japan” because he
a.
looked like a very distinguished politician.
b.
advocated vast public works to combat unemployment.
c.
advocated budget deficit reduction in the midst of a recession.
d.
advocated easier monetary policy and lower interest rates to combat recession.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Should the Budget Always Be Balanced? The Short Run
61. Suppose that the economy is currently at full employment. All other things being equal, if the government implements
restrictive policies then the appropriate monetary policy is
a.
no change from the current policy.
b.
reduce the growth of the money supply.
c.
constant growth of the money supply.
d.
increase the growth of the money supply.
DISC: Monetary and fiscal policy
United States – BPROG: Reflective Thinking – BPROG: Analysis
Monetary and fiscal policy
Should the Budget Always Be Balanced? The Short Run
62. Suppose that the economy is currently at full employment. All other things being equal, if the government implements
expansionary fiscal policy, then the appropriate monetary policy is
a.
no change from the current policy.
b.
reduce the growth of the money supply.
c.
constant growth of the money supply.
d.
increase the growth of the money supply.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Should the Budget Always Be Balanced? The Short Run
63. If the President and Congress agree to balance the budget during a recession, then the appropriate monetary policy is
a.
no change from the current policy.
b.
reduce the growth of the money supply.
c.
constant growth of the money supply.
d.
increase the growth of the money supply.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Importance of the Policy Mix
64. In 2010 and 2011, many observers were worried that the
a.
budget would not be balanced and fiscal stimulus would be withdrawn too soon.
b.
budget would not be balanced and monetary stimulus would be withdrawn too soon.
c.
budget would be balanced and fiscal stimulus would be withdrawn too soon.
d.
budget would be balanced and monetary stimulus would be withdrawn too soon.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Importance of the Policy Mix
65. The budget deficit
a.
is the value of the government’s indebtedness at a moment in time.
b.
was $13.5 trillion in fiscal 2014.
c.
is the amount by which the government’s expenditures exceed receipts during a specific time period.
d.
All of the above are correct.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Deficits and Debt: Terminology and Facts
66. The national debt
a.
is increased by budget surpluses.
b.
is the value of the government’s indebtedness at a moment in time.
c.
exceeded $20 trillion in 2014.
d.
All of the above are correct.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Deficits and Debt: Terminology and Facts
67. If in fiscal year 2015, the federal government receives $2.2 trillion in revenues and spends $3.5 trillion for goods and
services, the national debt will
a.
increase by $2.2 trillion.
b.
increase by $1.3 trillion.
c.
decrease by $1.3 trillion.
d.
decrease by $2.2 trillion.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Deficits and Debt: Terminology and Facts
68. The deficit can be defined in simple terms as
a.
Tax receipts − government expenditures + transfers.
b.
Tax receipts + government expenditures + transfers.
c.
Government expenditures + transfers − tax receipts.
d.
Government expenditures − transfers − tax receipts.
DISC: Monetary and fiscal policy
United States – BPROG: Reflective Thinking – BPROG: Analysis
Monetary and fiscal policy
Deficits and Debt: Terminology and Facts
69. A budget surplus exists when
a.
Tax receipts < government expenditures + transfers.
b.
Tax receipts > government expenditures + transfers.
c.
Government expenditures − transfers > tax receipts.
d.
Government expenditures > transfers + tax receipts.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Deficits and Debt: Terminology and Facts
70. A budget deficit is best defined as the
a.
shortage of spending power created by a government spending cut.
b.
shortage of spending power created by a tax increase.
c.
accumulation of past debt that has not been covered by taxes.
d.
amount by which a government’s expenditures exceed receipts during a specific time period.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Deficits and Debt: Terminology and Facts