Question 1

Which of the following is correct?

Accepted Answer

If the government uses funds to pay for investments that generate economic growth, then future generations will benefit from the increased prosperity. This means that the debt need not burden them. However, if the government borrows money to finance current consumption or transfer payments, then the debt will transfer some of the burden to future generations, as they will have to pay for the spending without receiving any direct benefit. The other options are incorrect. Deficits can be financed by borrowing from overseas, issuing debt to domestic investors, or printing money, among other methods. The government debt is calculated as a stock and is not directly comparable to lifetime income, which is a flow.

Question 2

Part of the argument against deficits is that they

Accepted Answer

Deficits can lead to an increase in interest rates because the government has to borrow money to finance the deficit, which increases the demand for credit and, subsequently, interest rates. Higher interest rates also tend to decrease investment, as businesses and individuals are less likely to borrow money for investments or purchases when interest rates are high. Therefore, an increase in interest rates and decrease in investment is the most likely outcome of deficits.

Question 3

Over time,continued budget deficits lead to

Accepted Answer

Continued budget deficits signify that a government is spending more than it is earning, which leads to an increase in national debt. To finance the debt, the government issues bonds which reduce the amount of money available for private investments. This, in turn, reduces the capital stock available to businesses leading to a lower productivity. Therefore, a lower capital stock and lower productivity are the eventual consequences of continued budget deficits.

Question 4

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

Accepted Answer

An increase in the budget deficit typically indicates an increase in government borrowing, which can lead to an increase in interest rates. Higher interest rates make borrowing more expensive, leading to a decrease in investment. Therefore, we would expect an increased budget deficit to result in increased interest rates and decreased investment.

Question 5

Which of the following is not correct?

Accepted Answer

Social Security is designed to transfer wealth from younger generations to older generations through a pay-as-you-go system.

Question 6

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

Accepted Answer

When the government runs a large deficit, it may lead to an increase in interest rates due to increased demand for borrowing money, which may in turn decrease investment as borrowing becomes more expensive. Therefore, the answer is D.

Question 7

Government deficits mean that

Accepted Answer

Public saving is equal to tax revenue minus government spending. When the government runs a deficit, it is spending more than it is collecting in taxes, which means public saving is negative. National saving is the sum of public and private saving, so when public saving is negative, national saving is also lower than it would be otherwise. Therefore, choice D is correct.

Question 8

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

Accepted Answer

If nominal GDP is growing at a faster rate than the budget deficit, the debt-to-GDP ratio is decreasing, making the debt sustainable. Additionally, saving for future generations can help offset any potential burden.

Question 9

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

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 10

If the budget deficit were reduced,

Accepted Answer

Reducing the budget deficit typically decreases government borrowing, which can lead to lower interest rates. Lower interest rates make borrowing cheaper, encouraging more investment.

Question 11

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

Accepted Answer

More generous education subsidies would transfer wealth from old to young as it would provide more financial assistance to younger individuals who are pursuing education. This would reduce the financial burden on young people and increase their wealth, while not affecting the wealth of older people. A and D are incorrect as they do not directly transfer wealth from old to young. B is incorrect as decreased building of highways and bridges does not involve any transfer of wealth.

Question 12

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

Accepted Answer

When the government runs a surplus, it means they are collecting more revenue than they are spending. This results in a decrease in the amount of borrowing the government needs to do, thus decreasing demand for borrowing and leading to lower interest rates. Lower interest rates make borrowing cheaper, which leads to increased investment. Therefore, we would expect decreased interest rates and increased investment.

Question 13

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?

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.

Question 14

The national debt

Accepted Answer

The national debt exists because of past government budget deficits, which is the amount by which government spending exceeds government revenue in a given year.

Question 15

The effect of budget deficits on interest rates

Accepted Answer

Budget deficits tend to increase the demand for borrowing, which in turn increase interest rates. Higher interest rates make it more expensive for businesses to borrow money for investment leading to a decrease in private investment. This decrease in investment can eventually lead to a decline in the capital stock. So, the correct choice is D.

Question 16

Which of the following is not correct?

Accepted Answer

The U.S. debt per-person is not large compared with average lifetime income. The correct statement is that the U.S. debt per-person is large compared with current income.

Question 17

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

Accepted Answer

Improving government infrastructure benefits all generations, including the young, by enhancing economic productivity and quality of life, rather than directly transferring wealth from young to old.

Question 18

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

Accepted Answer

A government deficit means that the government is borrowing more money than it is taking in through taxes. This will increase demand for loans in the market and cause interest rates to rise as lenders try to attract more borrowers. Higher interest rates make it more expensive to borrow money for investment purposes, so investment is expected to decrease. Therefore, the correct choice is D - increased interest rates and decreased investment.

Question 19

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

Accepted Answer

Raising taxes to provide more generous Social Security benefits would transfer wealth from the young to the old, as the young would be paying higher taxes to provide benefits to the elderly.

Question 20

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

Accepted Answer

A decrease in the government deficit reduces the demand for loanable funds, which tends to lower interest rates. Lower interest rates make borrowing cheaper, encouraging more investment.

Quiz 23: Six Debates Over Macroeconomic Policy: Should the Government Balance Its Budget

Which of the following is correct?

Part of the argument against deficits is that they

Over time,continued budget deficits lead to

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

Which of the following is not correct?

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

Government deficits mean that

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

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

If the budget deficit were reduced,

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

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

The national debt

The effect of budget deficits on interest rates

Which of the following is not correct?

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

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

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

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