Question 1

How is government debt different from an individual's debt? Provide three reasons.

Accepted Answer

Government is perpetual.Unlike individua

Question 2

Paying interest on internal government debt involves a:

Accepted Answer

A) net reduction in domestic income. 
B) redistribution of income among citizens of the country. 
C) net increase in domestic income. 
D) redistribution of income to citizens of other countries. 
A) net reduction in domestic income. 
B) redistribution of income among citizens of the country. 
C) net increase in domestic income. 
D) redistribution of income to citizens of other countries.

Question 3

If actual income is $300 billion, potential income is $350 billion, the total deficit is $20 billion, and tax revenue increases with income, then the structural deficit can be any of the following except:

Accepted Answer

A) zero. 
B) $1 billion. 
C) $10 billion. 
D) $20 billion. 
A) zero. 
B) $1 billion. 
C) $10 billion. 
D) $20 billion.

Question 4

If an economy operates below potential income, the actual deficit is:

Accepted Answer

A) smaller than the structural deficit. 
B) larger than the structural deficit. 
C) the same as the structural deficit. 
D) comparable to the structural deficit. 
A) smaller than the structural deficit. 
B) larger than the structural deficit. 
C) the same as the structural deficit. 
D) comparable to the structural deficit.

Question 5

The cyclical surplus is $450 billion, potential output is $10 trillion and tax rate is 15 percent. With this information, we can infer that the actual output of this economy is:

Accepted Answer

A) $13 trillion. 
B) $13.5 trillion. 
C) $6 trillion. 
D) $6.5 trillion. 
A) $13 trillion. 
B) $13.5 trillion. 
C) $6 trillion. 
D) $6.5 trillion.

Question 6

In order to calculate the real deficit, economists need to know the:

Accepted Answer

A) nominal deficit and the rate of inflation. 
B) rate of inflation and the debt. 
C) rate of inflation, the debt, and the nominal deficit. 
D) rate of inflation, the debt, and the real interest rate. 
A) nominal deficit and the rate of inflation. 
B) rate of inflation and the debt. 
C) rate of inflation, the debt, and the nominal deficit. 
D) rate of inflation, the debt, and the real interest rate.

Question 7

During World War II, the economic recession that reduced equilibrium income below potential income in most European countries:

Accepted Answer

A) increased the structural deficit. 
B) eliminated any structural deficit. 
C) increased the cyclical deficit. 
D) eliminated any cyclical deficit. 
A) increased the structural deficit. 
B) eliminated any structural deficit. 
C) increased the cyclical deficit. 
D) eliminated any cyclical deficit.

Question 8

An economy's actual income is $800 billion,its potential income is $900 billion,and it has a budget deficit of $50 billion and a marginal tax rate of 25%.Government expenditures do not vary with income.What is its structural deficit? What is the passive deficit?

Accepted Answer

If the economy were at its potential inc

Question 9

Deficits may be desirable in the short run if they:

Accepted Answer

A) help to stabilize the economy when the economy falls below potential output. 
B) increase savings necessary for future investment and growth. 
C) increase savings necessary for future consumption and demand. 
D) help to stabilize the economy when the economy is above potential output. 
A) help to stabilize the economy when the economy falls below potential output. 
B) increase savings necessary for future investment and growth. 
C) increase savings necessary for future consumption and demand. 
D) help to stabilize the economy when the economy is above potential output.

Question 10

Holding the nominal deficit, nominal interest rate, and total debt constant, an increase in the inflation rate will:

Accepted Answer

A) not affect the real deficit. 
B) raise the real deficit. 
C) lower the real deficit. 
D) either raise or lower the real deficit depending on the real interest rate. 
A) not affect the real deficit. 
B) raise the real deficit. 
C) lower the real deficit. 
D) either raise or lower the real deficit depending on the real interest rate.

Question 11

The real deficit depends on the:

Accepted Answer

A) level of government expenditures and receipts only. 
B) rate of inflation only. 
C) nominal deficit, the rate of inflation, and the government debt. 
D) rate of interest only. 
A) level of government expenditures and receipts only. 
B) rate of inflation only. 
C) nominal deficit, the rate of inflation, and the government debt. 
D) rate of interest only.

Question 12

The portion of the budget deficit or surplus that would exist even if the economy were at its potential income is called the cyclical deficit or cyclical surplus.

Accepted Answer

A) True 
 B)False

Question 13

An economy has a government debt of $6 trillion,its GDP is $10 trillion,and it has a 3% growth rate.
(a)What is its debt-to-GDP ratio?
(b)What size government budget deficit could this economy have without increasing the debt to GDP ratio?

Accepted Answer

(a)Debt/GDP = 6/10 = 0.6 or 60%.
(b)The

Question 14

In the short-run framework, budget deficits should:

Accepted Answer

A) never be run since they slow economic growth over the long run. 
B) never be run since they crowd out investment in the short run. 
C) be run on a temporary basis whenever the economy is below potential output. 
D) be run on a permanent basis since they can always be financed by printing money. 
A) never be run since they slow economic growth over the long run. 
B) never be run since they crowd out investment in the short run. 
C) be run on a temporary basis whenever the economy is below potential output. 
D) be run on a permanent basis since they can always be financed by printing money.

Question 15

If Japan's debt level is much higher than that of the United States, the United States has more flexibility to run deficits.

Accepted Answer

A) True 
 B)False

Question 16

In the formula to calculate the real deficit, which of the following increases the real deficit?

Accepted Answer

A) A smaller nominal deficit 
B) A lower interest rate 
C) A larger debt 
D) A lower inflation rate 
A) A smaller nominal deficit 
B) A lower interest rate 
C) A larger debt 
D) A lower inflation rate

Question 17

The nominal surplus is $100 billion,inflation is 3%,and total debt is $5 trillion.What is the real surplus?

Accepted Answer

To calculate the value of the real surpl

Question 18

For each of the following state what is happening to the structural and passive budget deficits:
(a)Economy is experiencing an expansion.
(b)Economy is experiencing a recession.
(c)Economy is growing at its long-term secular growth rate.
(d)The potential level of output declines while equilibrium output remains unchanged.

Accepted Answer

(a)Passive deficit is declining.Structur

Question 19

Budget deficits contribute to higher debt.

Accepted Answer

A) True 
 B)False

Question 20

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 cyclical 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.

Exam 31: Deficits and Debt: the Austerity Debate

How is government debt different from an individual's debt? Provide three reasons.

Paying interest on internal government debt involves a:

If actual income is $300 billion, potential income is $350 billion, the total deficit is $20 billion, and tax revenue increases with income, then the structural deficit can be any of the following except:

If an economy operates below potential income, the actual deficit is:

The cyclical surplus is $450 billion, potential output is $10 trillion and tax rate is 15 percent. With this information, we can infer that the actual output of this economy is:

In order to calculate the real deficit, economists need to know the:

During World War II, the economic recession that reduced equilibrium income below potential income in most European countries:

An economy's actual income is $800 billion,its potential income is $900 billion,and it has a budget deficit of $50 billion and a marginal tax rate of 25%.Government expenditures do not vary with income.What is its structural deficit? What is the passive deficit?

Deficits may be desirable in the short run if they:

Holding the nominal deficit, nominal interest rate, and total debt constant, an increase in the inflation rate will:

The real deficit depends on the:

The portion of the budget deficit or surplus that would exist even if the economy were at its potential income is called the cyclical deficit or cyclical surplus.

An economy has a government debt of $6 trillion,its GDP is $10 trillion,and it has a 3% growth rate. (a)What is its debt-to-GDP ratio? (b)What size government budget deficit could this economy have without increasing the debt to GDP ratio?

In the short-run framework, budget deficits should:

If Japan's debt level is much higher than that of the United States, the United States has more flexibility to run deficits.

In the formula to calculate the real deficit, which of the following increases the real deficit?

The nominal surplus is $100 billion,inflation is 3%,and total debt is $5 trillion.What is the real surplus?

Budget deficits contribute to higher debt.

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 cyclical deficit:

Economics and Economic Reasoning

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Market Failure Versus Government Failure

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Financial Crises, Panics, and Unconventional Monetary Policy

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Macro Policy in a Global Setting

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