Question 1

If the nominal deficit is $300 billion, inflation is 10 percent, and total debt is $2 trillion, then the real deficit is equal to:

Accepted Answer

A) −$20 billion. 
B) −$100 billion. 
C) $20 billion. 
D) $100 billion. 
A) −$20 billion. 
B) −$100 billion. 
C) $20 billion. 
D) $100 billion. D

Question 2

What has been happening to the U.S.government debt and interest on that debt (relative to GDP)since WWII?

Accepted Answer

The debt has been increasing but the debt/GDP ratio has varied.Specifically,the debt/GDP ratio decreased during the 1950s and 1960s;increased in the 1970s and 1980s;has been decreasing since the early 1990s but is still well above where it was during the 1960s.
Interest payment as a percentage of GDP remained relatively constant at about 1.5% after WWII and until the early 1970s.After that,the ratio increased in the late 1970s and early 1980s due to higher interest rates and large increases in debt.In the late 1990s,the ratio decreased as a result of lower interest rates and budget surpluses to less than 3% of GDP.The ratio continued to fall until the early 2000s.
Short Answer Questions

Question 3

Countries with larger debts in terms of absolute value are worse off than countries with smaller debts.

Accepted Answer

A) True 
 B)False  False

Question 4

When the economy is operating close to potential, the budget deficit experienced is:

Accepted Answer

A) primarily cyclical. 
B) primarily structural. 
C) neither structural nor cyclical. 
D) about evenly split between structural and cyclical. 
A) primarily cyclical. 
B) primarily structural. 
C) neither structural nor cyclical. 
D) about evenly split between structural and cyclical.

Question 5

Which of the following statements gives the correct definition of the real deficit?

Accepted Answer

A) Real deficit = Nominal deficit + (inflation × total debt) 
B) Real deficit = Nominal deficit + (total debt/inflation) 
C) Real deficit = Nominal deficit - (total debt/inflation) 
D) Real deficit = Nominal deficit - (inflation × total debt) 
A) Real deficit = Nominal deficit + (inflation × total debt) 
B) Real deficit = Nominal deficit + (total debt/inflation) 
C) Real deficit = Nominal deficit - (total debt/inflation) 
D) Real deficit = Nominal deficit - (inflation × total debt)

Question 6

Debt is measured relative to GDP because:

Accepted Answer

A) the ability of a country to pay off its debt depends on its productive capacity. 
B) the ability to produce output depends on the size of the nation's debt. 
C) GDP is always used as a reference point in economics. 
D) as long as this ratio remains high, the government will have no trouble repaying the debt. 
A) the ability of a country to pay off its debt depends on its productive capacity. 
B) the ability to produce output depends on the size of the nation's debt. 
C) GDP is always used as a reference point in economics. 
D) as long as this ratio remains high, the government will have no trouble repaying the debt.

Question 7

Suppose that the economy has a structural deficit of $200 billion but is running a budget surplus. It follows that:

Accepted Answer

A) there is no cyclical deficit or surplus. 
B) there is a cyclical surplus. 
C) there is a cyclical deficit. 
D) the cyclical deficit cannot be determined without more information. 
A) there is no cyclical deficit or surplus. 
B) there is a cyclical surplus. 
C) there is a cyclical deficit. 
D) the cyclical deficit cannot be determined without more information.

Question 8

As the interest rate rises, debt service:

Accepted Answer

A) decreases. 
B) does not change, but debt increases. 
C) increases. 
D) does not change and neither does the debt. 
A) decreases. 
B) does not change, but debt increases. 
C) increases. 
D) does not change and neither does the debt.

Question 9

If the nominal deficit is $100 billion, inflation is 10 percent, and total debt is $2 trillion, then the real deficit is:

Accepted Answer

A) −$20 billion (a surplus). 
B) −$100 billion (a surplus). 
C) $20 billion. 
D) $100 billion. 
A) −$20 billion (a surplus). 
B) −$100 billion (a surplus). 
C) $20 billion. 
D) $100 billion.

Question 10

If a $10 trillion economy is growing at a real rate of 2.5 percent a year, what must this economy do to maintain a constant debt-to-GDP ratio?

Accepted Answer

A) Run increasingly larger surpluses 
B) Maintain a balanced budget 
C) Have increasingly smaller deficits 
D) Have increasingly larger deficits 
A) Run increasingly larger surpluses 
B) Maintain a balanced budget 
C) Have increasingly smaller deficits 
D) Have increasingly larger deficits

Question 11

Suppose potential income is $60 billion, actual income is $40 billion, and expenditures don't vary with income. If the actual budget deficit is $4 billion and the marginal tax rate is 20 percent, the structural deficit:

Accepted Answer

A) is zero. 
B) is between zero and $4 billion. 
C) is $4 billion. 
D) cannot be determined from the given information. 
A) is zero. 
B) is between zero and $4 billion. 
C) is $4 billion. 
D) cannot be determined from the given information.

Question 12

How does Social Security make the current budget deficit smaller than it otherwise would be?

Accepted Answer

The current budget deficit is larger tha

Question 13

When the U.S. debt-to-GDP ratio has fallen, it has generally been because:

Accepted Answer

A) the budget deficit fell. 
B) the budget deficit rose. 
C) income fell. 
D) income rose. 
A) the budget deficit fell. 
B) the budget deficit rose. 
C) income fell. 
D) income rose.

Question 14

Government debt is defined as:

Accepted Answer

A) a shortfall of incoming revenue under outgoing payment. 
B) a shortfall of outgoing payments under incoming revenue. 
C) accumulated deficits minus accumulated surpluses. 
D) accumulated deficits plus accumulated surpluses. 
A) a shortfall of incoming revenue under outgoing payment. 
B) a shortfall of outgoing payments under incoming revenue. 
C) accumulated deficits minus accumulated surpluses. 
D) accumulated deficits plus accumulated surpluses.

Question 15

The structural deficit:

Accepted Answer

A) rises as the economy expands and falls when it contracts. 
B) falls as the economy expands and rises when it contracts. 
C) changes as actual income changes regardless of potential income. 
D) does not change when actual income changes; it but changes only when potential income changes. 
A) rises as the economy expands and falls when it contracts. 
B) falls as the economy expands and rises when it contracts. 
C) changes as actual income changes regardless of potential income. 
D) does not change when actual income changes; it but changes only when potential income changes.

Question 16

External government debt is:

Accepted Answer

A) government debt owed to its own citizens. 
B) government debt owed to individuals in foreign countries. 
C) government debt owed by one branch of the government to another. 
D) debt that individuals in foreign countries owe to the U.S. government. 
A) government debt owed to its own citizens. 
B) government debt owed to individuals in foreign countries. 
C) government debt owed by one branch of the government to another. 
D) debt that individuals in foreign countries owe to the U.S. government.

Question 17

If the national debt increases in any given year, it follows that the government:

Accepted Answer

A) sold bonds in that year to finance a budget surplus. 
B) bought bonds in that year to finance a budget surplus. 
C) sold bonds in that year to finance a budget deficit. 
D) bought bonds in that year to finance a budget deficit. 
A) sold bonds in that year to finance a budget surplus. 
B) bought bonds in that year to finance a budget surplus. 
C) sold bonds in that year to finance a budget deficit. 
D) bought bonds in that year to finance a budget deficit.

Question 18

Which of the following is a reason why government debt is different from individual debt?

Accepted Answer

A) Government has fewer sources of income to finance its debt than individuals. 
B) Government cannot create money to finance its debt. 
C) Government debt can be owed to foreigners, unlike the debt of individuals. 
D) Government is ongoing, individuals are not. 
A) Government has fewer sources of income to finance its debt than individuals. 
B) Government cannot create money to finance its debt. 
C) Government debt can be owed to foreigners, unlike the debt of individuals. 
D) Government is ongoing, individuals are not.

Question 19

The government decides to reduce its expenditure by $250. The multiplier in this economy is 4 and the tax rate is 22 percent. The net effect of this contractionary fiscal policy is to:

Accepted Answer

A) increase the budget deficit by $30. 
B) increase the budget deficit by $220. 
C) decrease the budget deficit by $30. 
D) decrease the budget deficit by $220. 
A) increase the budget deficit by $30. 
B) increase the budget deficit by $220. 
C) decrease the budget deficit by $30. 
D) decrease the budget deficit by $220.

Question 20

If a $6 billion economy is growing at a real rate of 5 percent a year and there is no inflation, what must the government do to maintain a constant debt-to-GDP ratio?

Accepted Answer

A) Run a surplus of $300 million 
B) Balance the budget 
C) Run a deficit of $300 million 
D) Run a deficit of $600 million 
A) Run a surplus of $300 million 
B) Balance the budget 
C) Run a deficit of $300 million 
D) Run a deficit of $600 million

Exam 31: Deficits and Debt: the Austerity Debate

If the nominal deficit is $300 billion, inflation is 10 percent, and total debt is $2 trillion, then the real deficit is equal to:

What has been happening to the U.S.government debt and interest on that debt (relative to GDP)since WWII?

Countries with larger debts in terms of absolute value are worse off than countries with smaller debts.

When the economy is operating close to potential, the budget deficit experienced is:

Which of the following statements gives the correct definition of the real deficit?

Debt is measured relative to GDP because:

Suppose that the economy has a structural deficit of $200 billion but is running a budget surplus. It follows that:

As the interest rate rises, debt service:

If the nominal deficit is $100 billion, inflation is 10 percent, and total debt is $2 trillion, then the real deficit is:

If a $10 trillion economy is growing at a real rate of 2.5 percent a year, what must this economy do to maintain a constant debt-to-GDP ratio?

Suppose potential income is $60 billion, actual income is $40 billion, and expenditures don't vary with income. If the actual budget deficit is $4 billion and the marginal tax rate is 20 percent, the structural deficit:

How does Social Security make the current budget deficit smaller than it otherwise would be?

When the U.S. debt-to-GDP ratio has fallen, it has generally been because:

Government debt is defined as:

The structural deficit:

External government debt is:

If the national debt increases in any given year, it follows that the government:

Which of the following is a reason why government debt is different from individual debt?

The government decides to reduce its expenditure by $250. The multiplier in this economy is 4 and the tax rate is 22 percent. The net effect of this contractionary fiscal policy is to:

If a $6 billion economy is growing at a real rate of 5 percent a year and there is no inflation, what must the government do to maintain a constant debt-to-GDP ratio?

Economics and Economic Reasoning

The Production Possibility Model, Trade, and Globalization

Economic Institutions

Supply and Demand

Using Supply and Demand

Describing Supply and Demand: Elasticities

Taxation and Government Intervention

Market Failure Versus Government Failure

Comparative Advantage, Exchange Rates, and Globalization

International Trade Policy

Production and Cost Analysis I

Production and Cost Analysis II

Perfect Competition

Monopoly and Monopolistic Competition

Oligopoly and Antitrust Policy

Real-World Competition and Technology

Work and the Labor Market

Who Gets What the Distribution of Income

The Logic of Individual Choice: the Foundation of Supply and Demand

Game Theory, Strategic Decision Making, and Behavioral Economics

Thinking Like a Modern Economist

Behavioral Economics and Modern Economic Policy

Microeconomic Policy, Economic Reasoning, and Beyond

Economic Growth, Business Cycles, and Unemployment

Measuring and Describing the Aggregate Economy

The Keynesian Short-Run Policy Model: Demand-Side Policies

The Classical Long-Run Policy Model: Growth and Supply-Side Policies

The Financial Sector and the Economy

Monetary Policy

Financial Crises, Panics, and Unconventional Monetary Policy

The Fiscal Policy Dilemma

Jobs and Unemployment

Inflation, Deflation, and Macro Policy

International Financial Policy

Macro Policy in a Global Setting

Structural Stagnation and Globalization

Macro Policy in Developing Countries

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