Question 1

Which of the following is considered a legitimate concern of a large public debt?

Accepted Answer

A large public debt can lead to higher interest rates, which may crowd out private investment by making borrowing more expensive for businesses and individuals.

Question 2

The real burden of an increase in the public debt

Accepted Answer

When the economy is in a severe depression, the increase in public debt can stimulate economic activity, potentially offsetting the burden of the debt.

Question 3

(Last Word) Which of the following would not help to relieve the Social Security and Medicare shortfalls?

Accepted Answer

Restricting immigration of skilled working-age adults would not help to relieve the Social Security and Medicare shortfalls. In fact, it could potentially worsen the problem by reducing the number of skilled workers contributing to the programs through payroll taxes. The other options listed, extending the Social Security tax to a higher level of earnings, increasing the retirement age for collecting Social Security and Medicare benefits, and reducing benefits for wealthier individuals, are all potential solutions that could help to address the funding gaps in these programs.

Question 4

A contractionary ﬁscal policy shifts the aggregate demand curve leftward.

Accepted Answer

Contractionary fiscal policy involves decreasing government spending, increasing taxes, or a combination of both. This will reduce disposable income and decrease consumer spending, leading to a leftward shift in the AD curve.

Question 5

If the MPC in the economy is 0.75, government could shift the aggregate demand curve rightward by
$30 billion by cutting taxes by $10 billion.

Accepted Answer

If the MPC is 0.75, then each $1 of tax cut will increase consumer spending by $0.75. Therefore, a tax cut of $10 billion would increase aggregate demand by $7.5 billion ($10 billion x 0.75), and to shift the aggregate demand curve rightward by $30 billion, a tax cut of $40 billion would be needed ($30 billion / 0.75).

Question 6

Demand-pull inﬂation can be restrained by increasing government spending and reducing taxes.

Accepted Answer

Increasing government spending and reducing taxes are expansionary fiscal policies that stimulate aggregate demand, leading to an increase in prices and exacerbating demand-pull inflation rather than restraining it. To restrain demand-pull inflation, contractionary fiscal policies that reduce aggregate demand, such as reducing government spending and increasing taxes, are more appropriate.

Question 7

Which one of the following might offset a crowding-out effect of ﬁnancing a large public debt?

Accepted Answer

Public investment can help offset the crowding-out effect because it can stimulate economic growth and increase the demand for loans. This can lead to higher interest rates, but also more investment in the private sector, helping to balance out the decrease in private investment caused by the increase in public debt. A decline in net exports, a decrease in the money supply, and a decline in public investment would all likely exacerbate the crowding-out effect.

Question 8

In 2018, about ____ percent of the U.S. public debt was held by the U.S. government and Federal Reserve.

Accepted Answer

In 2018, approximately 37 percent of the U.S. public debt was held by the U.S. government and Federal Reserve. This includes holdings by various government trust funds, such as Social Security, as well as debt owned by the Federal Reserve itself.

Question 9

Built-in stability is synonymous with discretionary ﬁscal policy.

Accepted Answer

Built-in stability refers to automatic stabilizers in the economy such as unemployment benefits and progressive taxation. Discretionary fiscal policy, on the other hand, refers to deliberate changes in government spending and taxation to stabilize the economy. They are not synonymous.

Question 10

Which of the following is not considered a legitimate concern of a large public debt?

Accepted Answer

Bankruptcy of the federal government is not considered a legitimate concern of a large public debt because governments can always create money to pay off their debts, unlike individuals or businesses.

Question 11

To say that "the U.S. public debt is mostly held internally" is to say that

Accepted Answer

When we say that the U.S. public debt is mostly held internally, it means that the bulk of the public debt is owned by U.S. citizens and institutions. This implies that the country is not greatly reliant on foreign investors to finance its debt obligations.

Question 12

Payment of interest on the U.S. public debt

Accepted Answer

Payment of interest on the U.S. public debt is thought to increase income inequality. This is because the majority of the U.S. public debt is owned by the wealthy and financial institutions, so the interest payments go primarily to them, further increasing their wealth and income. This results in a widening gap between the rich and poor.

Question 13

Expansionary ﬁscal policy is so named because it involves an expansion of the nation's money supply.

Accepted Answer

Expansionary fiscal policy involves increasing government spending and/or reducing taxes to stimulate economic growth, which may lead to an increase in the money supply. However, it is not necessarily the same as an expansion of the money supply. The expansion of the money supply is typically the result of monetary policy, which is controlled by the central bank.

Question 14

The federal government has a large public debt that it ﬁnances through borrowing. As a result, real interest rates are higher than otherwise and the volume of private investment spending is lower. This
Illustrates the

Accepted Answer

The situation described in the question is an example of crowding-out effect. When the government increases its borrowing, it competes with the private sector for funds, leading to higher interest rates and a decrease in private investment spending. This phenomenon is referred to as crowding-out effect.

Question 15

Which of the following is the best example of public investment?

Accepted Answer

Public investment refers to government spending on infrastructure and other projects that benefit society as a whole. Construction of highways falls under this category as it creates jobs, improves transportation efficiency, and supports economic growth. Salaries of senators and representatives, funding of regulatory agencies, and government expenditures on food assistance programs are necessary government expenses, but do not necessarily qualify as public investments.

Question 16

(Last Word) In 1960 the ratio of workers to Social Security and Medicare beneﬁciaries was ______; by 2040 it is projected to be _________.

Accepted Answer

The answer of (Last Word) In 1960 the ratio of...

Question 17

The most likely way the public debt burdens future generations, if at all, is by

Accepted Answer

When the government has a high level of debt, it may be more hesitant to invest in important areas such as education, infrastructure, and research and development, which could reduce the current level of investment. This could have negative impacts on future generations as they will inherit an economy with a lower level of productivity and growth potential.

Question 18

Other things equal, the stock of capital inherited by future generations is likely to be smaller when government spending

Accepted Answer

When government spending is financed by borrowing, it can lead to higher interest rates and crowd out private investment. This reduction in private investment can lead to a smaller stock of capital being inherited by future generations, as less investment in capital goods occurs.

Question 19

In 2018, about ____ percent of the U.S. public debt was held by people and institutions abroad.

Accepted Answer

The answer of In 2018, about ____ percent of the...

Question 20

The crowding-out effect suggests that

Accepted Answer

The crowding-out effect suggests that government borrowing to finance the public debt increases the real interest rate and reduces private investment. This is because when the government borrows a large amount of money, it competes with private businesses for investment funds, driving up interest rates and making it more expensive for businesses to borrow money. As a result, businesses may reduce their investment in capital goods, leading to a decrease in aggregate demand and economic growth.

Quiz 13: Fiscal Policy, Deficits, and Debt