Question 1

Which of the programs below would not transfer wealth from young to old generations?
A)Taxes are reduced as a result of cutting expenditures on education.
B)Taxes are raised to improve government infrastructure such as roads and bridges.
C)Taxes are raised to provide more generous Social Security benefits.
D)Taxes are raised to provide more generous Medicare benefits.

Accepted Answer

The answer of Which of the programs below would not...

Question 2

In fiscal year 2011, the U.S. government ran a deficit of about $1,300 billion. In fiscal year 2012, the government ran a deficit of about $1,087 billion. Other things the same, this change would be expected to have
A)decreased interest rates and investment.
B)decreased interest rates and increased investment.
C)increased interest rates and investment.
D)increased interest rates and decreased investment.

Accepted Answer

A decrease in the deficit would lead to decreased demand for government borrowing, which would lower interest rates. Lower interest rates would encourage increased investment.

Question 3

In fiscal year 2008, the U.S. government ran a deficit of about $459 billion. In fiscal year 2009, the government ran a deficit of about $1,413 billion. Other things the same, this change would be expected to have
A)decreased interest rates and investment.
B)decreased interest rates and increased investment.
C)increased interest rates and investment.
D)increased interest rates and decreased investment.

Accepted Answer

A large increase in government deficit typically leads to an increase in demand for borrowing, which puts upward pressure on interest rates. As interest rates increase, the cost of borrowing for businesses and individuals also increases, which tends to decrease investment.

Question 4

Which of the following is not correct?
A)Government debt can continue to rise forever.
B)If the government uses funds to pay for investment programs, on net the debt need not burden future generations.
C)Social Security does not transfer wealth from younger generations to older generations.
D)The average U.S. citizens' share of the government debt represents less than 2 percent of her lifetime income.

Accepted Answer

Social Security is designed to transfer wealth from younger working generations to older retired generations through the collection of payroll taxes from current workers to pay for benefits for current retirees. This is a common form of intergenerational transfer, but it does not necessarily mean that younger generations are being unfairly burdened or that older generations are undeserving of the support.

Question 5

The effect of budget deficits on interest rates
A)increases private investment, so eventually the capital stock rises.
B)increases private investment, so eventually the capital stock falls.
C)decreases private investment, so eventually the capital stock rises.
D)decreases private investment, so eventually the capital stock falls.

Accepted Answer

Budget deficits lead to increased government borrowing, which competes with private borrowing and raises interest rates. Higher interest rates lead to reduced private investment and a decline in the capital stock over time.

Question 6

Suppose that a country has an inflation rate of about 2 percent per year and a real GDP growth rate of about 2.5 percent per year. Then the government can have a deficit of about
A)5 percent of GDP without raising the debt-to-income ratio.
B)4.5 percent of GDP without raising the debt-to-income ratio.
C)1.25 percent of GDP without raising the debt-to-income ratio.
D).5 percent of GDP without raising the debt-to-income ratio.

Accepted Answer

The government can have a deficit of about 4.5 percent of GDP without raising the debt-to-income ratio because the real GDP growth rate of 2.5 percent can offset the inflation rate of 2 percent, leaving a net growth rate of 0.5 percent. Therefore, if the government's deficit is kept at 4.5 percent or less, the debt-to-income ratio will not increase.

Question 7

Which of the programs below would transfer wealth from the young to the old?
A)Taxes are raised to provide better education.
B)Taxes are raised to improve government infrastructure such as roads and bridges.
C)Taxes are raised to provide more generous Social Security benefits.
D)None of the above transfer wealth form the young to the old.

Accepted Answer

Raising taxes to provide more generous Social Security benefits directly benefits the elderly, who receive Social Security payments, at the expense of younger generations who pay into the system but receive benefits later in life. Therefore, it transfers wealth from the young to the old. Choices A and B do not necessarily transfer wealth from the young to the old, as improvements in education and infrastructure could benefit members of all age groups.

Question 8

Which of the following is not correct?
A)A potential cost of deficits is that they reduce national saving, thereby reducing growth of the capital stock and output growth.
B)Deficits give people the opportunity to consume at the expense of their children, but they do not require them to do so.
C)The U.S. debt per-person is large compared with average lifetime income.
D)Current spending may benefit future generations.

Accepted Answer

The U.S. debt per-person is large compared with current income, not average lifetime income.

Question 9

In fiscal year 2001, the U.S. government ran a surplus of about $127 billion. In fiscal year 2002, the government ran a deficit of $159 billion. Other things the same, this change would be expected to have
A)decreased interest rates and investment.
B)decreased interest rates and increased investment.
C)increased interest rates and investment.
D)increased interest rates and decreased investment.

Accepted Answer

The increase in government deficit means that the government needs to borrow more, which will increase demand for loans and push up interest rates. This increase in interest rates will decrease investment as borrowing costs increase, making it more expensive for businesses to fund investments.

Question 10

Suppose the budget deficit is rising 3 percent per year and nominal GDP is rising 5 percent per year. The debt created by these continuing deficits is
A)sustainable, but the future burden on your children cannot be offset.
B)sustainable, and the future burden on your children can be offset if you save for them.
C)not sustainable, and the future burden on your children cannot be offset.
D)not sustainable, but the future burden on your children can be offset if you save for them.

Accepted Answer

The answer of Suppose the budget deficit is rising 3...

Question 11

In fiscal year 1997, the U.S. government ran a deficit of about $21.9 billion. In fiscal year 1998, the government ran a surplus of about $69.3 billion. Other things the same, we would expect this change
A)decreased interest rates and investment.
B)decreased interest rates and increased investment.
C)increased interest rates and investment.
D)increased interest rates and decreased investment.

Accepted Answer

When the government runs a surplus, it reduces the amount of borrowing it needs to do, which reduces demand for loans and ultimately leads to lower interest rates. Lower interest rates make it more attractive for private individuals and corporations to borrow and invest, which would result in increased investment. Therefore, we would expect a decrease in interest rates and an increase in investment.

Question 12

Last year a country's real GDP grew by 4%, it's inflation rate was 2.5%, and it's government budget deficit was about $250 billion. It's debt to GDP ratio was unchanged. About what was it's debt at the start of last year?
A)16.7 trillion
B)10.0 trillion
C)6.25 trillion
D)3.85 trillion

Accepted Answer

The answer of Last year a country's real GDP grew...

Question 13

From fiscal year 2012 to fiscal year 2013 China's budget deficit rose 50%. Other things the same, we would expect this to have
A)decreased interest rates and investment.
B)decreased interest rates and increased investment.
C)increased interest rates and investment.
D)increased interest rates and decreased investment.

Accepted Answer

An increase in the budget deficit indicates that the government is spending more than it is earning through revenue. This leads to an increase in demand for borrowing and, therefore, an increase in interest rates. Higher interest rates mean that investments become relatively more costly, leading to a decrease in investment.

Question 14

Last year a country's real GDP grew by 2%, it's inflation rate was 3%, and it's government budget deficit was about $200 billion. It's debt-to-GDP ratio was unchanged. About what was it's debt at the start of last year?
A)10.0 trillion
B)6.7 trillion
C)4 trillion
D)None of the above are correct.

Accepted Answer

The answer of Last year a country's real GDP grew...

Question 15

Which of the following is correct?
A)Deficits always require people to consume at the expense of their children.
B)If the government uses funds to pay for investment programs, on net the debt need not burden future generations.
C)If the government is in debt it must be running a deficit currently.
D)The current government debt is a large share of lifetime income.

Accepted Answer

If the government uses funds to pay for investment programs, it can boost economic growth which can increase future tax revenues, making it possible to pay off the debt without burdening future generations. The other options are not necessarily true. Deficits do not always require people to consume at the expense of their children, the government may also borrow to finance investment or other activities. The government debt may not be a large share of lifetime income for everyone. Finally, the government may be in debt even if it is not running a current deficit if it has accumulated debt from previous periods.

Question 16

Which of the following would transfer wealth from old to young?
A)Increases in the budget deficit.
B)Decreased building of highways and bridges.
C)More generous education subsidies.
D)Indexation of Social Security benefits to inflation.

Accepted Answer

More generous education subsidies would transfer wealth from the old to the young because young people are more likely to be students and benefit from the subsidies. The other options either have no impact on the transfer of wealth between generations or may actually transfer wealth from the young to the old (such as indexation of Social Security benefits to inflation).

Question 17

Over time, continued budget deficits lead to
A)a higher capital stock and higher productivity.
B)a higher capital stock and lower productivity.
C)a lower capital stock and higher productivity.
D)a lower capital stock and lower productivity.

Accepted Answer

Continued budget deficits can lead to higher government debt, which can crowd out private investment and result in a lower capital stock. With a lower capital stock, there may be lower productivity due to a decrease in available resources and investment in infrastructure and technological advancements. Therefore, the correct choice is D.

Question 18

Suppose that the country of Aquilonia has an inflation rate of about 6 percent per year and a real growth rate of about 3 percent per year. Suppose also that it has nominal GDP of about 500 billion units of currency and current nominal national debt of 100 billion units of domestic currency. Which of the following government spending and taxation figures will keep the debt to income ratio constant?
A)government spending equal to 50 billion units and tax collections equal to 48 billion units
B)government spending equal to 50 billion units and tax collections equal to 41 billion units
C)government spending equal to 50 billion units and tax collections equal to 40 billion units
D)government spending equal to 50 billion units and tax collections equal to 32 billion units

Accepted Answer

The answer of Suppose that the country of Aquilonia has...

Question 19

A country has a growth rate of 3%. Government spending is 60 billion units of currency and its tax revenues are 32 billion units of currency. The current national debt is 400 billion units of currency. At which inflation rate is its debt-to-income ratio unchanged?
A)2%
B)3%
C)4%
D)5%

Accepted Answer

The answer of A country has a growth rate of...

Question 20

Suppose that the country of Aquilonia has an inflation rate of about 2 percent per year and a real growth rate of about 3 percent per year. Suppose also that it has nominal GDP of about 400 billion units of currency and current nominal national debt of 200 billion units of domestic currency. Which of the following government spending and taxation figures will keep the debt to-income ratio constant?
A)government spending equal to 30 billion units and tax collections equal to 25 billion units
B)government spending equal to 30 billion units and tax collections equal to 20 billion units
C)government spending equal to 30 billion units and tax collections equal to 10 billion units
D)government spending equal to 30 billion units and tax collections equal to 5 billion units

Accepted Answer

In order to keep the debt-to-income ratio constant, the nominal national debt should not increase faster than nominal GDP. If inflation is 2% and real growth is 3%, nominal GDP will grow at a rate of 5%. Therefore, if the government spends 30 billion units and collects 20 billion units in taxes, it will have a deficit of 10 billion units each year. However, because nominal GDP is growing by 5%, the ratio of debt-to-income will remain constant at 0.5 (200 billion / 400 billion). If the government spends more or collects less in taxes, the deficit will increase, causing the debt-to-income ratio to rise.

Quiz 36: Six Debates Over Macroeconomic Policy

Which of the programs below would not transfer wealth from young to old generations?

In fiscal year 2011, the U.S. government ran a deficit of about $1,300 billion. In fiscal year 2012, the government ran a deficit of about $1,087 billion. Other things the same, this change would be expected to have

In fiscal year 2008, the U.S. government ran a deficit of about $459 billion. In fiscal year 2009, the government ran a deficit of about $1,413 billion. Other things the same, this change would be expected to have

Which of the following is not correct?

The effect of budget deficits on interest rates

Suppose that a country has an inflation rate of about 2 percent per year and a real GDP growth rate of about 2.5 percent per year. Then the government can have a deficit of about

Which of the programs below would transfer wealth from the young to the old?

Which of the following is not correct?

In fiscal year 2001, the U.S. government ran a surplus of about $127 billion. In fiscal year 2002, the government ran a deficit of $159 billion. Other things the same, this change would be expected to have

Suppose the budget deficit is rising 3 percent per year and nominal GDP is rising 5 percent per year. The debt created by these continuing deficits is

In fiscal year 1997, the U.S. government ran a deficit of about $21.9 billion. In fiscal year 1998, the government ran a surplus of about $69.3 billion. Other things the same, we would expect this change

Last year a country's real GDP grew by 4%, it's inflation rate was 2.5%, and it's government budget deficit was about $250 billion. It's debt to GDP ratio was unchanged. About what was it's debt at the start of last year?

From fiscal year 2012 to fiscal year 2013 China's budget deficit rose 50%. Other things the same, we would expect this to have

Last year a country's real GDP grew by 2%, it's inflation rate was 3%, and it's government budget deficit was about $200 billion. It's debt-to-GDP ratio was unchanged. About what was it's debt at the start of last year?

Which of the following is correct?

Which of the following would transfer wealth from old to young?

Over time, continued budget deficits lead to

A country has a growth rate of 3%. Government spending is 60 billion units of currency and its tax revenues are 32 billion units of currency. The current national debt is 400 billion units of currency. At which inflation rate is its debt-to-income ratio unchanged?