Question 1

Which of the following is true concerning the national debt?

Accepted Answer

A) It equals the budget deficit. 
B) When the budget deficit is declining,the national debt will fall. 
C) A budget deficit will reduce the national debt. 
D) A budget surplus will reduce the national debt. 
A) It equals the budget deficit. 
B) When the budget deficit is declining,the national debt will fall. 
C) A budget deficit will reduce the national debt. 
D) A budget surplus will reduce the national debt.

Question 2

As the outstanding debt of a nation becomes very large relative to the size of the economy,

Accepted Answer

A) the borrowing cost of the government will decline. 
B) lenders will have no choice but to hold the outstanding bonds and to buy the new ones as they are offered. 
C) a country like the United States will have no choice but to default on the payments to bond holders. 
D) if the country has a central bank,it will almost certainly resort to money creation to service the debt rather than directly default. 
A) the borrowing cost of the government will decline. 
B) lenders will have no choice but to hold the outstanding bonds and to buy the new ones as they are offered. 
C) a country like the United States will have no choice but to default on the payments to bond holders. 
D) if the country has a central bank,it will almost certainly resort to money creation to service the debt rather than directly default.

Question 3

Deficit spending and a large national debt can have important effects on future generations because they

Accepted Answer

A) make it possible for those living in the present to pass the opportunity costs of current government spending on to future generations. 
B) can significantly impact spending on capital formation. 
C) will pass interest obligations on to future generations with no corresponding benefits. 
D) will cause the government to go bankrupt. 
A) make it possible for those living in the present to pass the opportunity costs of current government spending on to future generations. 
B) can significantly impact spending on capital formation. 
C) will pass interest obligations on to future generations with no corresponding benefits. 
D) will cause the government to go bankrupt.

Question 4

If the federal government fails to reduce the nation's debt relative to income,

Accepted Answer

A) it will become easier to borrow in the global credit markets. 
B) the interest expenses on the outstanding debt will increase. 
C) the cost of holding outstanding debt will decrease. 
D) it will be easier to cover the interest on outstanding debt with tax revenues. 
A) it will become easier to borrow in the global credit markets. 
B) the interest expenses on the outstanding debt will increase. 
C) the cost of holding outstanding debt will decrease. 
D) it will be easier to cover the interest on outstanding debt with tax revenues.

Question 5

Currently,the strategy of the Social Security system is to run surpluses to prepare for the retirement of the baby boom generation.The effectiveness of this strategy is being undermined because

Accepted Answer

A) rising interest rates make it more expensive for Social Security to borrow. 
B) inflation is reducing the value of the Social Security surplus. 
C) the trust fund is being used to finance current government expenditures,and the bonds held by the trust fund are an obligation of the U.S.Treasury. 
D) the federal budget surplus reduces the Social Security surplus. 
A) rising interest rates make it more expensive for Social Security to borrow. 
B) inflation is reducing the value of the Social Security surplus. 
C) the trust fund is being used to finance current government expenditures,and the bonds held by the trust fund are an obligation of the U.S.Treasury. 
D) the federal budget surplus reduces the Social Security surplus.

Question 6

Currently,the Federal Reserve earns approximately $30 billion of interest annually on its holdings of government bonds.Only a small portion of these earnings is required to cover the Fed's operating costs.The remainder of these earnings is

Accepted Answer

A) distributed to the member banks of the Federal Reserve system. 
B) invested in corporate stocks held by the Fed. 
C) returned to the U.S.Treasury. 
D) loaned to commercial banks. 
A) distributed to the member banks of the Federal Reserve system. 
B) invested in corporate stocks held by the Fed. 
C) returned to the U.S.Treasury. 
D) loaned to commercial banks.

Question 7

What is the difference between the federal budget deficit and the national debt?

Accepted Answer

The federal budget deficit is a flow con

Question 8

According to the new classical view,if people appropriately realize that an increase in government debt implies higher future taxes,they will

Accepted Answer

A) save less since the substitution of debt for taxes makes them wealthier. 
B) increase their consumption since the substitution of debt for taxes makes them wealthier. 
C) save more now to meet the future tax liability implied by the increase in debt. 
D) alter neither their saving nor their consumption rate. 
A) save less since the substitution of debt for taxes makes them wealthier. 
B) increase their consumption since the substitution of debt for taxes makes them wealthier. 
C) save more now to meet the future tax liability implied by the increase in debt. 
D) alter neither their saving nor their consumption rate.

Question 9

According to the traditional (crowding-out)view,large budget deficits during normal times will lead to

Accepted Answer

A) bank failures in the future. 
B) a smaller capital stock in the future. 
C) lower interest rates in the future. 
D) a bankrupt government in the future. 
A) bank failures in the future. 
B) a smaller capital stock in the future. 
C) lower interest rates in the future. 
D) a bankrupt government in the future.

Question 10

The national debt is the

Accepted Answer

A) difference between a nation's exports and imports of goods and services. 
B) sum of the personal debt of all citizens in the United States. 
C) indebtedness of the federal government in the form of outstanding interest-earning bonds. 
D) sum of the net personal debts of Americans to foreigners. 
A) difference between a nation's exports and imports of goods and services. 
B) sum of the personal debt of all citizens in the United States. 
C) indebtedness of the federal government in the form of outstanding interest-earning bonds. 
D) sum of the net personal debts of Americans to foreigners.

Question 11

Since 1970,the federal debt has expanded rapidly because

Accepted Answer

A) revenues have gone down,while expenditures have gone up. 
B) expenditures have risen faster than revenues. 
C) expenditures have increased slightly,while revenues have remained about the same. 
D) revenues have fallen faster than expenditures. 
A) revenues have gone down,while expenditures have gone up. 
B) expenditures have risen faster than revenues. 
C) expenditures have increased slightly,while revenues have remained about the same. 
D) revenues have fallen faster than expenditures.

Question 12

According to the traditional (crowding-out)view,budget deficits will

Accepted Answer

A) reduce interest rates. 
B) increase interest rates and retard private investment. 
C) reduce the investments of foreigners in the United States. 
D) increase the capital stock available to future generations. 
A) reduce interest rates. 
B) increase interest rates and retard private investment. 
C) reduce the investments of foreigners in the United States. 
D) increase the capital stock available to future generations.

Question 13

Why are the bonds held by the Fed and government agencies excluded from the privately held debt figures?

Accepted Answer

A) The U.S.Treasury does not have to pay off these bonds. 
B) These bonds were not issued by the U.S.Treasury. 
C) These bonds do not create a net-interest obligation for the federal government. 
D) These bonds are not interest-bearing bonds. 
A) The U.S.Treasury does not have to pay off these bonds. 
B) These bonds were not issued by the U.S.Treasury. 
C) These bonds do not create a net-interest obligation for the federal government. 
D) These bonds are not interest-bearing bonds.

Question 14

When a nation has a high debt/GDP ratio,that nation generally will

Accepted Answer

A) require high taxes just to pay interest on the debt. 
B) be able to borrow funds at relatively low real interest rates. 
C) find that its bonds are attractive to international investors seeking low-risk investments. 
D) want to increase spending in order to gain the confidence of international investors. 
A) require high taxes just to pay interest on the debt. 
B) be able to borrow funds at relatively low real interest rates. 
C) find that its bonds are attractive to international investors seeking low-risk investments. 
D) want to increase spending in order to gain the confidence of international investors.

Question 15

External debt is that portion of the national debt

Accepted Answer

A) held by private investors. 
B) held by the Federal Reserve. 
C) that the United States does not intend to repay. 
D) held by foreigners. 
A) held by private investors. 
B) held by the Federal Reserve. 
C) that the United States does not intend to repay. 
D) held by foreigners.

Question 16

When the United States ran large budget deficits during 2001-2011,

Accepted Answer

A) private investment was strong and consumer expenditures declined as a percentage of GDP. 
B) private investment was weak and consumption increased as a share of GDP. 
C) the trade deficit of the United States shrank,indicating that borrowing from foreigners was declining. 
D) the deficits were financed exclusively through borrowing from domestic sources. 
A) private investment was strong and consumer expenditures declined as a percentage of GDP. 
B) private investment was weak and consumption increased as a share of GDP. 
C) the trade deficit of the United States shrank,indicating that borrowing from foreigners was declining. 
D) the deficits were financed exclusively through borrowing from domestic sources.

Question 17

As of March,2011,the privately held portion of the national debt was approximately

Accepted Answer

A) 5 percent of the total. 
B) 20 percent of the total. 
C) 58 percent of the total. 
D) 88 percent of the total. 
A) 5 percent of the total. 
B) 20 percent of the total. 
C) 58 percent of the total. 
D) 88 percent of the total.

Question 18

The U.S.Treasury both pays and receives almost all of the interest on that portion of the national debt that is held by

Accepted Answer

A) domestic investors. 
B) foreign investors. 
C) government agencies and the Federal Reserve system. 
D) commercial banks. 
A) domestic investors. 
B) foreign investors. 
C) government agencies and the Federal Reserve system. 
D) commercial banks.

Question 19

Suppose a new country is formed,and its government has the following revenues and expenditures for its first three years of existence.
 
Which of the following is correct regarding this government?

Accepted Answer

A) In the third year,it had a $5 national debt,and after the third year,it has a $25 deficit. 
B) In the third year,it ran a $5 deficit,and its national debt after the third year is $45. 
C) In the third year,it ran a $5 surplus,and its national debt after the third year is $25. 
D) In the third year,it ran a $5 deficit,and its national debt after the third year is $25. 
A) In the third year,it had a $5 national debt,and after the third year,it has a $25 deficit. 
B) In the third year,it ran a $5 deficit,and its national debt after the third year is $45. 
C) In the third year,it ran a $5 surplus,and its national debt after the third year is $25. 
D) In the third year,it ran a $5 deficit,and its national debt after the third year is $25.

Question 20

Domestically financed deficit spending shifts the cost of government spending to future generations by

Accepted Answer

A) causing a higher future tax liability with no offsetting gains. 
B) shifting the opportunity cost of the resources used by government onto future generations. 
C) reducing the capital stock,lowering productivity and wages. 
D) all of the above. 
A) causing a higher future tax liability with no offsetting gains. 
B) shifting the opportunity cost of the resources used by government onto future generations. 
C) reducing the capital stock,lowering productivity and wages. 
D) all of the above.

Exam 36: The Federal Budget and the National Debt

Which of the following is true concerning the national debt?

As the outstanding debt of a nation becomes very large relative to the size of the economy,

Deficit spending and a large national debt can have important effects on future generations because they

If the federal government fails to reduce the nation's debt relative to income,

Currently,the strategy of the Social Security system is to run surpluses to prepare for the retirement of the baby boom generation.The effectiveness of this strategy is being undermined because

Currently,the Federal Reserve earns approximately $30 billion of interest annually on its holdings of government bonds.Only a small portion of these earnings is required to cover the Fed's operating costs.The remainder of these earnings is

What is the difference between the federal budget deficit and the national debt?

According to the new classical view,if people appropriately realize that an increase in government debt implies higher future taxes,they will

According to the traditional (crowding-out)view,large budget deficits during normal times will lead to

The national debt is the

Since 1970,the federal debt has expanded rapidly because

According to the traditional (crowding-out)view,budget deficits will

Why are the bonds held by the Fed and government agencies excluded from the privately held debt figures?

When a nation has a high debt/GDP ratio,that nation generally will

External debt is that portion of the national debt

When the United States ran large budget deficits during 2001-2011,

As of March,2011,the privately held portion of the national debt was approximately

The U.S.Treasury both pays and receives almost all of the interest on that portion of the national debt that is held by

Suppose a new country is formed,and its government has the following revenues and expenditures for its first three years of existence. Which of the following is correct regarding this government?

Domestically financed deficit spending shifts the cost of government spending to future generations by

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