Question 1

If the government issues new government bonds to finance a budget deficit,the real interest rate in financial markets will ________ and investment spending will ________.

Accepted Answer

When the government issues new bonds, it increases the supply of bonds in the market which in turn increases the competition among investors to buy these bonds. Due to this increase in supply and competition, the bond prices will decrease and as a result, the interest rates will increase. As the interest rates increase, the cost of borrowing also increases which makes businesses and firms more hesitant to invest or increase their investment. Hence, investment spending will decrease.

Question 2

Explain why many economists are skeptical about whether Ricardian equivalence describes the behaviour of households in the economy.

Accepted Answer

The answer of Explain why many economists are skeptical about...

Question 3

The conventional view among economists is that persistent budget ________ lead to a lower level of potential GDP in the ________ run.

Accepted Answer

The conventional view among economists is that persistent budget deficits lead to a lower level of potential GDP in the long run. This is because deficits can lead to higher interest rates, which can discourage investment and lead to a crowding out of private investment. Additionally, deficits can lead to an accumulation of public debt, which can reduce confidence in the government's ability to repay its debts and lead to higher borrowing costs in the future.

Question 4

Suppose that for the nation of Calliope,the debt-to-GDP ratio is 325%,the average annual growth rate is 1.1%,the average inflation rate is 0.5%,and the average nominal interest rate is 2.2%.Based on this information,determine if fiscal policy is sustainable in Calliope,and if not,what the primary budget deficit would have to be to make fiscal policy sustainable.

Accepted Answer

The answer of Suppose that for the nation of Calliope,the...

Question 5

Ricardian equivalence suggests that forward-looking households ________ the future taxes required to pay off government debt,so that reductions in lump-sum taxes have ________ effect on the economy.

Accepted Answer

According to Ricardian equivalence, households fully anticipate the future taxes required to pay off government debt. Therefore, reductions in lump-sum taxes have no effect on the economy because households save the tax reduction to offset the future tax increase needed to pay off the government debt.

Question 6

The conventional view among economists is that persistent budget deficits lead to ________ real interest rates and ________ private investment.

Accepted Answer

The conventional view among economists is that persistent budget deficits lead to higher real interest rates as governments borrow more, which leads to decreased availability of funds and increased competition for those funds, driving up interest rates. Higher real interest rates then lead to crowding out of private investment, as it becomes more expensive for individuals and businesses to borrow money for investment.

Question 7

All of the following are possible private-sector adjustments to an increase in the government's budget deficit,except

Accepted Answer

Increasing private savings (A) and decreasing investment (B) are possible private-sector adjustments to an increase in the government's budget deficit. However, decreasing expenditures on transfer programs (C) is not a likely option as increasing transfer programs is a way that the government tries to expand the economy in the low-income groups. Increasing the trade deficit by increasing imports and/or decreasing exports (D) is also possible, but it does not fall under private-sector adjustments – it is a result of a change in the overall trade balance.

Question 8

Based on the conventional view of fiscal policy and potential GDP in the long run,explain what happens to each of the following if the government runs a budget deficit:
a. the supply of loanable funds to the private sector
b. long-term real interest rates
c. the capital stock
d. the investment rate
e. potential GDP

Accepted Answer

The answer of Based on the conventional view of fiscal...

Question 9

The conventional view among economists is that persistent budget deficits lead to a ________ capital stock and a ________ level of potential GDP in the long run.

Accepted Answer

Persistent budget deficits lead to a crowding out of private investment as the government's borrowing competes with private investors for available funds, leading to a smaller capital stock in the long run. This, in turn, leads to a lower level of potential GDP as the economy is operating with a smaller productive capacity.

Question 10

What is necessary for fiscal policy to be sustainable? Why is fiscal policy in countries like Greece,Ireland,Spain,Italy,and Portugal not considered sustainable?

Accepted Answer

The answer of What is necessary for fiscal policy to...

Question 11

The government's budget deficit is financed by some combination of all of the following except

Accepted Answer

Transfer payments are not a source of financing for a budget deficit; they are government expenditures.

Question 12

List the three possible ways the government can make adjustments to an increase in the government's budget deficit.

Accepted Answer

The answer of List the three possible ways the government...

Question 13

Suppose the government cuts taxes by $300 million dollars this year and must pay off its debt next year by increasing taxes by $300 million.According to Ricardian equivalence,private saving will ________ this year and ________ next year,all else equal.

Accepted Answer

According to Ricardian equivalence, individuals anticipate future tax increases to pay off government debt, so they increase their savings by the amount of the tax cut to offset future tax liabilities.

Question 14

If the government decreases income taxes by $500 billion and does not pursue a policy change,which of the following would require the private sector to adjust in order to finance the tax decrease?

Accepted Answer

Issuing $500 billion in new Treasury bonds would require the private sector to purchase these bonds, effectively financing the tax decrease through increased government borrowing.

Question 15

Suppose the government cuts taxes by $300 million dollars this year and must pay off its debt next year by increasing taxes by $300 million.According to Ricardian equivalence,consumption spending will ________ this year and ________ next year,all else equal.

Accepted Answer

According to Ricardian equivalence, taxpayers will recognize that the tax cut is just temporary, and so they will save the entire $300 million. With no change in consumption spending this year, there will be no need to decrease consumption spending by $300 million next year to pay off the debt, so consumption spending will not change next year either. Therefore, the correct answer is D.

Quiz 15: Fiscal Policy and the Government Budget in the Long Run

If the government issues new government bonds to finance a budget deficit,the real interest rate in financial markets will and investment spending will .

Explain why many economists are skeptical about whether Ricardian equivalence describes the behaviour of households in the economy.

The conventional view among economists is that persistent budget lead to a lower level of potential GDP in the run.

Ricardian equivalence suggests that forward-looking households the future taxes required to pay off government debt,so that reductions in lump-sum taxes have effect on the economy.

The conventional view among economists is that persistent budget deficits lead to real interest rates and private investment.

All of the following are possible private-sector adjustments to an increase in the government's budget deficit,except

The conventional view among economists is that persistent budget deficits lead to a capital stock and a level of potential GDP in the long run.

What is necessary for fiscal policy to be sustainable? Why is fiscal policy in countries like Greece,Ireland,Spain,Italy,and Portugal not considered sustainable?

The government's budget deficit is financed by some combination of all of the following except

List the three possible ways the government can make adjustments to an increase in the government's budget deficit.

Suppose the government cuts taxes by $300 million dollars this year and must pay off its debt next year by increasing taxes by $300 million.According to Ricardian equivalence,private saving will this year and next year,all else equal.

If the government decreases income taxes by $500 billion and does not pursue a policy change,which of the following would require the private sector to adjust in order to finance the tax decrease?

Suppose the government cuts taxes by $300 million dollars this year and must pay off its debt next year by increasing taxes by $300 million.According to Ricardian equivalence,consumption spending will this year and next year,all else equal.