Question 1

When the government finances a deficit by selling its securities to the Fed

Accepted Answer

A)   it will have a smaller inflationary impact than if it sells securities to households and firms.
B)   interest rates will rise by greater amounts than if these securities are sold to households and firms.
C)   it is spared having to pay interest on the borrowed money, reducing borrowing costs.
D)   there will be increases in the money supply, aggregate demand, and price level.
E)   the value of these securities are not counted as part of the national debt because they are held by a government agency. D

Question 2

One generally recognized problem of large government budgetary deficits is

Accepted Answer

A)   that they crowd out private investment and lower U.S. exports.
B)   that the debt is primarily "owed to ourselves."
C)   the burden any current government borrowing inevitably imposes on future generations.
D)   the recessions that such government deficits simultaneously cause.
E)   the addition to our country's productive capacity as a result of the deficits. A

Question 3

The 1990 budget agreement between President Bush and Congress incorporated

Accepted Answer

A)   an increase in both the income tax and some excise tax rates.
B)   substantial reductions in defense spending with no change in taxes.
C)   a significant increase in the money supply to cover the revenue shortfall.
D)   a line-item veto option the president can use to ensure a balanced budget.
E)   a supply-side tax cut designed to improve worker incentives. A

Question 4

Balancing the government's budget over the course of each business cycle

Accepted Answer

A)   results in a stable economy at all times.
B)   does not take into account the fact that the size of the deficits needed to reduce unemployment may not equal the size of the surpluses needed to moderate subsequent inflation.
C)   guarantees a steady decrease in the national debt.
D)   is a policy biased in favor of reducing unemployment at the cost of allowing persistent inflation.
E)   is called functional finance.

Question 5

The phenomenon of a government deficit accompanied by a tight money policy,leading to a rise in interest rates and causing a reduction in private spending,is an example of

Accepted Answer

A)   rational expectations theory.
B)   the law of diminishing returns.
C)   the equation of exchange.
D)   the acceleration principle.
E)   the crowding-out effect.

Question 6

The United States' national debt

Accepted Answer

A)   has been steadily declining since World War II.
B)   represents a smaller share of national output than in 1945.
C)   is currently larger than its GDP.
D)   is primarily an externally held debt.
E)   totals less than $1 trillion, two-thirds of which is held by government agencies.

Question 7

During the last 30 years,the federal government budget has

Accepted Answer

A)   failed to record a surplus in any year.
B)   recorded a surplus only in the year 1984.
C)   had surpluses scattered over 10 of these years.
D)   been in surplus annually since 1995.
E)   recorded a surplus for the years 1999-2001.

Question 8

If the House and Senate pass different versions of a tax bill

Accepted Answer

A)   the president gets to choose which version becomes law.
B)   the Treasury Department is called in to arrange a compromise.
C)   the legislation automatically dies and the process must begin all over again.
D)   a conference committee is formed to iron out the differences between the two houses.
E)   the Senate version prevails unless vetoed by the president.

Question 9

A government budget deficit

Accepted Answer

A)   is more inflationary when financed by higher tax rates.
B)   is generally considered undesirable in the Keynesian view of economic policy.
C)   can never occur when the structural deficit is zero.
D)   that is financed by creating new money draws funds that might otherwise have been spent on consumption and investment.
E)   could result from recession-induced decreases in tax revenues rather than from increases in government spending.

Question 10

Various kinds of economic analysis to help senators and representatives evaluate different budgetary programs and proposals are undertaken by the

Accepted Answer

A)   Treasury Department.
B)   Office of Management and Budget.
C)   Internal Revenue Service.
D)   Congressional Budget Office.
E)   Office of Economic Opportunity.

Question 11

An excess of government revenues over expenditures

Accepted Answer

A)   is most appropriate during a severe recession.
B)   is called a surplus.
C)   causes the national debt to grow larger.
D)   has been the norm in the U.S. economy since 1980.
E)   leads to a decline in national saving.

Question 12

Proponents of a budget that promotes an optimal combination of unemployment and inflation generally hold that the problems of an increased national debt that may result are

Accepted Answer

A)   nonexistent.
B)   completely avoidable by the use of monetary policy.
C)   severe but worth the cost in the long run.
D)   completely unpredictable in scope and direction.
E)   small in comparison to social problems caused by unemployment and inflation.

Question 13

The national debt differs from consumer debt in that

Accepted Answer

A)   no interest is paid on the national debt.
B)   the national debt is of no economic consequence.
C)   most of the national debt is held by foreigners.
D)   the national debt influences the amount of aggregate spending.
E)   the national debt need never be paid off if it is held internally.

Question 14

A budget policy in which the government is expected to run a big enough surplus during periods of high employment to offset deficits during an ensuing period of excessive unemployment is called a(n)

Accepted Answer

A)   annually balanced budget.
B)   structural budget.
C)   full-employment budget.
D)   conflict-resolution budget.
E)   budget balanced over the course of the business cycle.

Question 15

The debt incurred in World War II

Accepted Answer

A)   was fully paid by taxes.
B)   was paid by war bonds in the 1940s.
C)   has never been fully paid and continues to be part of our current national debt.
D)   was negligible because the war effort was covered by our excess military capacity.
E)   was paid off by reparations payments from the defeated nations.

Question 16

An outcome associated with a large national debt is that the interest payments on the debt

Accepted Answer

A)   increase the size of the country's capital stock.
B)   require that the government sell off some of the country's assets such as public lands.
C)   lead to a redistribution of income from the poor to the rich.
D)   reduce the amount of tax revenues collected by the government.
E)   reduce the Fed's ability to carry out monetary policy.

Question 17

Supply-siders argue that federal budget surpluses should be used to

Accepted Answer

A)   pay down the national debt.
B)   increase government spending on education and health care.
C)   finance tax reductions.
D)   eliminate the deficit in the balance of payments.
E)   increase the money supply.

Question 18

If people believe that in the future the government will have to resort to creating money to pay the interest on debt currently financed by the sale of bonds,they may

Accepted Answer

A)   try to hold less money now, pushing up the current demand for goods and services as well as the current price level.
B)   increase the demand for current government bonds, raising bond prices and reducing interest rates.
C)   reduce current consumption because they expect price levels to fall in the future as the government is forced to lower taxes.
D)   increase their current holdings of government bonds because they expect interest rates on government bonds to rise.
E)   do any of the above since government deficits have an unpredictable impact on the economy.

Question 19

A government budget deficit has the greatest inflationary impact if it is financed by

Accepted Answer

A)   increasing personal and corporate taxes.
B)   creating new money.
C)   borrowing from consumers and businesses.
D)   impounding surplus funds.
E)   reducing government expenditures.

Question 20

Alternative policies regarding the federal budget include the

Accepted Answer

A)   annually and cyclically balanced budget policies and budgets that promote a socially optimal and attainable combination of inflation and unemployment.
B)   seldom, rarely, and never balanced budget policies.
C)   actual, proposed, and cyclically adjusted budget policies.
D)   executive, congressional, and treasury budget policies.
E)   monthly, quarterly, and annually balanced budget policies.

Exam 24: Surpluses,deficits,public Debt,and the Federal Budget