31 Chapter / 15
Budget Deficits and National Debt
1) BM31 \ C \\ Government Budget Deficits and Surpluses \ 1 \\ The federal budget deficit or surplus equals annual federal government outlays minus: (a) government transfer payments. (b) the rate of fiscal drag (c) government revenues. (d) marginal tax rates. (e) the balance of trade (exports-imports). 2) BM31 \ E \\ Government Budget Deficits and Surpluses \ 2 \\ An increase in the national debt of the United States is among the direct and immediate consequences of: (a) a recessionary gap. (b) powerful inflationary pressure. (c) a federal budget surplus. (d) excessively rapid growth of the money supply. (e) a federal budget deficit. 3) BM31 \ C \\ Budget Deficits: History\ 1 \\ During the past six decades, the federal budget has been: (a) balanced on a regular basis. (b) run at a surplus in most years. (c) in deficit most of the time. (d) the primary focus of monetary policy makers. 4) BM31 \ B \\ Budget Deficits: History \ 1 \\ During the administrations of Presidents Ronald Reagan and George W. Bush, the federal deficit rapidly: (a) decreased after sharp increases in income tax rates. (b) ballooned despite relatively strong economic recoveries from recessions. (c) eliminated balance-of-trade deficits. (d) evaporated because of powerful effects from the Laffer curve.
Ralph Byrns
Chapter 31 / 15: Budget Deficits and National Debt
Test Bank Two
1
5) BM31 \ D \\ Public Debt: History \ 2 \\ National debt declined most significantly as a percentage of U.S. Gross Domestic Product during the decade of the: (a) 1930s. (b) 1940s. (c) 1980s. (d) 1990s. (e) 2000s. 6) BM31 \ E \\ Budget Deficits: History \ 2 \\ The all-time record for total federal deficits in nominal terms during a four-year term of office was set during the administration of President: (a) Herbert Hoover [Great Depression | 1929-33]. (b) Franklin Roosevelt [World War II | 1941-1945]. (c) Ronald Reagan [Supply-side Economics | 1985-1988]. (d) Bill Clinton [Rubinomics | 1997-2001]. (e) George W. Bush [War on Terrorism | 2001-2005]. 7) BM31 \ C \\ Budget Deficits and National Debt: History \ 1 \\ Total budget deficits during the administration of George W. Bush have been: (a) eliminated by prudent fiscal practices. (b) financed primarily through tax increases. (c) larger than the cumulative sum of all previous deficits. (d) consistent with supply-sider predictions in their macroeconomic effects. 8) BM31 \ D \\ Public Debt: History \ 2 \\ As a proportion of U.S. GDP, our national debt in 2006 was about: (a) 50-70 percent of U.S. GDP. (b) 10 percent of GDP. (c) twice the level of GDP. (d) $1 jillion. 9) BM31 \ E \\ Public Debt: History \ 2 \\ The U.S. national debt, which exceeded $8 trillion in 2006, is NOT: (a) a result of cumulative budgetary deficits. (b) a stabilization instrument. (c) a financial investment that is relatively free of default risk. (d) increasingly held by foreigners since 1990. (e) a symptom of excessively high tax rates.
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10) BM31 \ C \\ Government Spending: History \ 2 \\ Between 1960 and 2000, what happened to the percentage breakdown between defense spending and non-defense spending in the federal budget? (a) There was very little change: defense spending remained at roughly 25% of the total federal budget. (b) Defense spending increased, while non-defense spending fell. (c) Defense spending fell, while non-defense spending increased. (d) They both rose as a percentage of the budget. 11) BM31 \ A \\ Public Debt: History \ 2 \\ Between 1946 and 2000, net federal debt increased: (a) less rapidly than private debt. (b) at about the same rate as private debt. (c) slightly more rapidly than private debt. (d) much more rapidly than private debt. 12) BM31 \ A \\ Public Debt and Private Debt: History \ 1 \\ Between World War II and 1980, private debt: (a) grew faster than public debt. (b) was completely monetized by the FED. (c) decreased relative to national debt. (d) worsened depressions during business cycles. 13) BM31 \ C \\ Public Debt: International Comparisons \ 2 \\ In international comparisons of public debt relative to GDP, the national debt of the United States is relatively: (a) large compared to other advanced countries. (b) much larger than the internal debt of all less-developed countries combined. (c) about average compared to other advanced countries. (d) small compared to other developed countries. (e) less stable than the debt of any other country in the world. 14) BM31 \ C \\ Public Debt and Private Debt \ 2 \\ The federal debt is large, growing, and: (a) substantially larger than private debt. (b) about the same size as the private debt. (c) still less than private debt. (d) primarily externally owned.
Ralph Byrns
Chapter 31 / 15: Budget Deficits and National Debt
Test Bank Two
3
15) BM31 \ A \\ Treasury Bonds and Financial Investors \ 2 \\ Inflation risk is most likely to eventually reduce the real wealth of financial investors when: (a) unstable governments issue vast quantities of Treasury bonds denominated in the country's own currency. (b) a severe wave of pessimism causes potential investors in real economic capital to panic. (c) shocks to an economy shift the Aggregate Supply curve to the right. (d) nominal interest rates plummet because of declines in the rate of expected inflation. (e) less developed countries are opened up to globalization. 16) BM31 \ E \\ Budget Constraints \ 2 \\ Borrowing against assets or expected future income is a mechanism for expanding the current budget constraints of: (a) private spenders. (b) corporations. (c) state and local government units. (d) the federal government. (e) all of the above. 17) BM31 \ C \\ Budget Constraints: Private \ 1 \\ Unlike households, proprietorships, or partnerships, corporations can secure funding for their activities through: (a) sales of current assets. (b) borrowing against expected future income. (c) sales of newly-issued common stock. (d) current income or savings [retained earnings] from previous income. (e) borrowing against assets. 18) BM31 \ C \\ Government Budget Constraints \ 2 \\ State and local governments lack the federal government's power to finance outlays by: (a) issuing stocks and bonds. (b) selling goods and services. (c) issuing new monetary base. (c) taxing or exercising eminent domain. (d) selling assets. 19) BM31 \ C \\ Government Budget Constraints \ 2 \\ Government budget surpluses make it possible to: (a) end excessive rates of unemployment. (b) print more money. (c) retire outstanding public debt. (d) raise taxes to balance the budget.
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20) BM31 \ A \\ Eminent Domain \ 2 \\ The military draft and the right of eminent domain are similar in that they are both: (a) examples of government confiscation. (b) outlawed by major 1970s legislation. (c) ways to increase government revenues. (d) financed by government deficits. 21) BM31 \ C \\ Federal Government Budget Constraints \ 1 \\ The federal government cannot obtain resources by: (a) exercising eminent domain. (b) levying taxes. (c) decreasing the money supply. (d) expanding the monetary base. 22) BM31 \ C \\ Federal Government Budget Constraints \ 2 \\ When the federal government spends more than it collects in revenues, it must: (a) rollover outstanding debt. (b) retire some previously printed money. (c) issue either more debt, or more monetary base. (d) reduce the required reserve ratio. (e) expand Aggregate Demand to avoid inflation. 23) BM31 \ B \\ Federal Government Budget Equation \ 1 \\ The formula G = T + B + MB symbolically represents the: (a) level of crowding-out by government. (b) federal government budget constraint. (c) opportunity cost of government purchases. (d) growth rate of the budget deficit. 24) BM31 \ C \\ Federal Government Budget Equation \ 3 \\ Let G = government spending, T = tax revenues, B = national debt, and MB = monetary base. If G-T < 0, it follows that: (a) B + MB < 0. (b) B - MB > 0. (c) the government can retire some existing debt. (d) the monetary base must fall.
Ralph Byrns
Chapter 31 / 15: Budget Deficits and National Debt
Test Bank Two
5
25) BM31 \ C \\ Federal Government Budget Constraints \ 3 \\ If government outlays during a year are $2000 billion and taxes collected are $1950 billion, the public debt: (a) must grow by $50 billion. (b) and the monetary base must both decrease by $50 billion. (c) will not change if the monetary base grows $50 billion. (d) and the monetary base must both increase by $50 billion. (e) will not change if the FED sells $50 billion in bonds. 26) BM31 \ C \\ Federal Government Budget Constraints \ 3 \\ If federal government outlays during a year are $2200 billion and taxes collected are $2100 billion, then privately-held national debt: (a) must grow by $100 billion. (b) and the monetary base must each decrease by $50 billion. (c) is unchanged if the Fed's open market operations increase the monetary base by $100 billion. (d) and the monetary base must each increase by $50 billion. (e) will not change if the FED sells an extra $100 billion in U.S. Treasury bonds. 27) BM31 \ B \\ Federal Government Budget Constraints \ 3 \\ Taxation to cover federal government outlays is usually: (a) more expansionary than government borrowing. (b) less expansionary than government borrowing or printing money. (c) more expansionary than printing money to cover a deficit. (d) an interest-free loan from you to the federal government. (e) most appropriate during a recession. 28) BM31 \ C \\ Federal Government Budget Constraints \ 3 \\ That federal "fiscal policy" [government taxing and spending] and "monetary policy" [especially open market operations] are inextricably linked is clearly shown in the: (a) absorption equation G-T = S-I+M-X. (b) Aggregate Expenditure equation C+I+G+X-M = AE. (c) comprehensive government budget equation G = T + B + MB. (d) national income accounts GDP CCA IBT = GNI. (e) equation of exchange MV = PQ. 29) BM31 \\ D \\ Monetary and Fiscal Policies: Interdependence \ 3 \\ Federal budget deficits are most inflationary when indirectly financed by sales of U.S. Treasury bonds to _____ during a period of _____. (a) foreign firms and governments | international payments deficits. (b) worried people who hoard money | depression. (c) general public | wartime. (d) the FED (which creates bank reserves and prints the money) | full employment.
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30) BM31 \ D \\ Federal Government Budget Equation \ 2 \\ Using Federal Reserve System open market operations to expand the money supply by a fixed small percentage rate each year as Milton Friedman has proposed is ultimately logically inconsistent with: (a) modern versions of neoclassical macroeconomic theory. (b) small structural budget deficits. (c) a Constitutional amendment mandating that the federal budget be balanced annually. (d) the absorption equation [G--T] = [S--I] + [M--X]. 31) BM31 \ C \\ Federal Government Budget Constraint \ 3 \\ During soaring budget deficits, if no new privately-held public debt is issued, then offsetting the deficits requires an equal increase in the: (a) international balance of trade. (b) rate of private investment. (c) monetary base. (d) rate of private saving. (e) sales of government bonds by the FED. 32) BM31 \ A \\ Federal Government Budget Constraints \ 1 \\ All else constant, federal budget surpluses allow decreases in the: (a) national debt. (b) pressure for recession. (c) potential money multiplier. (d) misery index. (e) export/import ratio. 33) BM31 \ A \\ Federal Government Budget Constraints\ 2 \\ When the federal government collects more than it spends, it may be forced to: (a) retire some national debt or reduce the monetary base. (b) print more money. (c) increase the national debt by selling bonds. (d) raise the interest rate. 34) BM31 \ A \\ Taxation and Aggregate Demand \ 2 \\ A macroeconomic reason for the federal government to collect taxes from you is to: (a) keep you from spending it. (b) base taxes on a benefit principle. (c) provide monetary base for the FED's conduct of expansionary open market operations. (d) avoid deflationary policies. (e) base taxation on an ability-to-pay principle.
Ralph Byrns
Chapter 31 / 15: Budget Deficits and National Debt
Test Bank Two
7
35) BM31 \\ D \\ Par Value \ 2 \\ A $10,000 30-year Treasury bond issued in 2000 initially paid 5 percent interest. If the interest rate dropped to 4 percent in 2003, the bonds' par value in 2003 was: (a) $12,5000. (b) $8,000. (c) $12,000. (d) $10,000. (e) $7,500. 36) BM31 \ D \\ Monetary and Fiscal Policies \ 2 \\ Fiscal and monetary policies to combat inflation would include a budget: (a) deficit, and cuts in the reserve requirements ratio. (b) surplus, and reduction of the discount rate. (c) deficit, and purchase of government securities by the FED. (d) surplus, and FED sales of government securities. 37) BM31 \ A \\ Constitutional Amendment to Balance the Budget \ 2 \\ According to traditional Keynesian analysis, a Constitutional amendment requiring the federal budget to balance annually would: (a) increase the severity of business cycles. (b) increase Aggregate Supply but reduce Aggregate Demand. (c) reduce the severity of business cycles. (d) reduce both Aggregate Supply and Aggregate Demand. 38) BM31 \ B \\ Constitutional Amendment to Balance the Budget \ 3 \\ Statistical evidence that Congress and the President view federal tax revenues as a serious constraint on federal purchases and transfer payments is: (a) strong, given constant battles in Congress to limit pork barrel projects with local benefits significantly exceeded by the costs born nationally through federal taxes. (b) extremely weak, given the track record of surpluses and deficits since World War II. (c) overwhelming, because many incumbent politicians have lost reelection because of taxpayer revolts. (d) powerful, so that a Constitutional Amendment requiring the federal budget to balance annually will almost certainly result in reductions in government spending instead of increases in tax rates. 39) BM31 \ D \\ Balancing the Federal Budget \ 2 \\ If federal budget deficits during recessions exactly offset surpluses during prosperity: (a) macroeconomic swings will be worsened. (b) indebtedness rises during prosperous periods. (c) interest rates rise during recessions. (d) the federal budget balances over the business cycle.
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40) BM31 \ C \\ Balancing the Federal Budget \ 2 \\ Cyclically balanced federal budgets would require a federal budget surplus: (a) until the U.S. national debt was paid off. (b) during recession and deficit during inflation. (c) during inflation and deficit during recession. (d) or deficit only at a full employment level. 41) BM31 \ C \\ Balancing the Federal Budget \ 3 \\ Discretionary fiscal policies will yield cyclically balanced budgets if business cycles are characterized by: (a) long recessions and short expansions. (b) short recessions and long recoveries. (c) symmetry. (d) causation from external macroeconomic shocks. 42) BM31 \ A \\ Balancing Government Budgets \ 3 \\ Business cycles are most obviously made more severe by: (a) state constitutions that require balancing the state budget each time Earth circles our sun. (b) flexible wages and prices. (c) the cumulative size of our national debt. (d) current trade deficits and imbalances of payments. (e) limits on the discretionary use of monetary policy. 43) BM31 \ C \\ Functional Finance \ 2 \\ The functional finance approach suggests that the: (a) budget should be balanced annually. (b) budget should balanced be over the business cycle. (c) economy should be balanced and budget deficits are irrelevant. (d) growth of government causes "crowding out." (e) tax structure alone can cure a budget deficit. 44) BM31 \ C \\ Functional Finance \ 2 \\ The relative magnitudes of federal tax revenues and federal government outlays are almost irrelevant, relative to whether the economy is "in balance," according to: (a) the theory of Ricardian equivalence. (b) liberal economics. (c) the functional finance approach. (d) crowding-out theory. (e) conservative economics.
Ralph Byrns
Chapter 31 / 15: Budget Deficits and National Debt
Test Bank Two
9
45) BM31 \ E \\ Functional Finance \ 2 \\ The functional finance approach to the government budget emphasizes that: (a) decreases in government purchases cause reductions. (b) taxes are required to finance government outlays. (c) income distribution is affected when government acquires more resources. (d) raising tax rates will shrink both the Aggregate Supply and Demand. (e) balancing the economy is more important than balancing government budgets. 46) BM31 \ D \\ Ricardian Equivalence \ 2 \\ Ricardian equivalence is the broad concept that it ultimately does not matter whether government outlays are secured by: (a) regulation, confiscation, or through tax-based funding. (b) printing money or funding gained through seignorage . (c) state and municipal governments, or by the federal government. (d) financing based on taxation or by government borrowing. (e) being on the right hand side or the left hand side of the Laffer curve. 47) BM31 \ D \\ Ricardian Equivalence \ 2 \\ Ricardian equivalence can be summarized as the idea that: (a) supply creates its own demand. (b) government spending is uncontrollable. (c) government should focus on balancing the economy instead of its budgets. (d) how government spending is financed is irrelevant. (e) the monetary base depends primarily on real output. 48) BM31 \ A \\ Crowding Out \ 2 \\ "Crowding-out" refers to the forced reductions in: (a) private activities when government expands. (b) interest rates when the federal budget has a surplus. (c) public debt when private purchases increase. (d) unemployment rates caused by rapid growth. (e) government spending when recessions shrink tax revenue. 49) BM31 \ C \\ Crowding Out \ 2 \\ Tax hikes, inflation, and higher interest rates are all mechanisms by which government spending: (a) increases Aggregate Supply. (b) reduces Aggregate Demand. (c) crowds-out" private spending. (d) reduces the long run rate of unemployment.
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50) BM31 \ B \\ Crowding Out \ 1 \\ New classical economists commonly assert that increases in government purchases decrease either private consumption or investment, an idea known as the: (a) functional finance approach. (b) crowding out hypothesis. (c) comprehensive government budget constraint. (d) confiscation approach. 51) BM31 \ B \\ Crowding Out \ 2 \\ Monetarists dislike the Keynesian prescription of government spending to cure a recession because government spending: (a) is like "pushing on a string". (b) may "crowd out" investment. (c) decreases Aggregate Demand. (d) pushes the economy into a liquidity trap. 52) BM31 \\ D \\ Crowding Out \ 2 \\ Private activities likely to be crowded-out by government spending would not include: (a) leisure time. (b) purchasing power. (c) investment profitability. (d) private incomes based on interest rates on bonds. 53) BM31 \ A \\ Crowding Out \ 2 \\ The opportunity costs of government expenditures decrease as the rate of: (a) unemployment and amounts idle capital both increase. (b) private saving decreases. (c) inflation increases. (d) Aggregate Demand approaches the rate of Aggregate Supply. 54) BM31 \ C \\ Crowding Out \ 2 \\ Crowding out is most likely to be a significant problem when the economy is: (a) characterized by a huge structural budget deficit. (b) on the left side of a Laffer curve. (c) at full employment but the federal government runs a huge budget deficit. (d) in the midst of a deep depression. (e) suffering from severe fiscal drag.
Ralph Byrns
Chapter 31 / 15: Budget Deficits and National Debt
Test Bank Two
11
55) BM31 \ B \\ Crowding Out \ 2 \\ The opportunity costs of new government spending tend to be lowest when the economy is: (a) in equilibrium. (b) experiencing widespread high unemployment. (c) governed by laws to balance the federal budget. (d) on its production possibilities frontier. 56) BM31 \ D \\ Crowding Out \ 2 \\ The idea that government purchases cause reductions of real private spending on consumer goods or investment in new economic capital is known as: (a) government opportunity costs. (b) foregone leisure. (c) printing money. (d) crowding-out. (e) debt rollover. 57) BM31 \ A \\ Crowding Out: Capital Markets \ 2 \\ A correct sequence of probable events precipitated by the new sale of Treasury bonds to cover a federal budget deficit would be bond prices: (a) down; interest rates up; Aggregate Demand dampened. (b) up; interest rates down; Aggregate Demand boosted. (c) down; interest rates up; Aggregate Supply boosted. (d) down, interest rates down; Aggregate Supply dampened. 58) BM31 \ B \\ Crowding Out: Capital Markets \ 2 \\ If the U.S. economy is at its potential level of national output, new U.S. Treasury bonds issued to cover federal deficits will probably result in: (a) expansion of eminent domain. (b) crowding-out of private investment. (c) hyperinflation and depression. (d) lower foreign investment in the U.S. (e) cyclical Ricardian equivalence. 59) BM31 \ A \\ Crowding-Out: Interest Rates \ 2 \\ If Treasury bonds are issued to cover a federal deficit, interest rates tend to rise because of an increase in: (a) total demands for loanable funds. (b) private demands for more liquid assets. (c) private investment to meet government contracts. (d) profits of the FED from its bond holdings. (e) supplies of loanable funds.
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60) BM31 \ E \\ Crowding Out: Interest Rates \ 2 \\ Future generations of Americans are most likely to lose because of current federal budget deficits if: (a) foreigners reduce their holdings of our previous national debt immediately. (b) internally held national debt rises as a percentage of GDP. (c) the national debt is continually rolled over, and is never paid off. (d) Americans buy more and more of foreign governments' national debts. (e) rising national debt drives up interest rates, and discourages private investment. 61) BM31 \ D \\ Crowding Out: Interest Rates \ 2 \\ Gross private saving absorbed by government purchases reduces the: (a) tax rate and increases tax revenue. (b) interest rate and increases investment. (c) rates of technological change and future consumption. (d) availability of loanable funds for private investment. (e) amount of public consumption "crowded-out." 62) BM31 \ A \\ Crowding Out: Interest Rates \ 2 \\ When the government finances a deficit by selling securities: (a) the resulting higher interest rate may crowd-out private investment. (b) taxes must be raised to cover the debt. (c) intergenerational income is unaffected if foreigners buy the bonds. (d) the macroeconomy usually collapses into a recession. 63) BM31 \ B \\ Crowding Out: Investment \ 2 \\ According to the crowding-out hypothesis, when the economy is at its capacity to produce, increases in government purchases cause declines in: (a) net exports [X-M]. (b) private investment or consumption. (c) the collection of tax revenues. (d) the purchasing power of the dollar. 64) BM31 \ C \\ Crowding Out: Inflation \ 2 \\ Inflation will be the process that facilitates crowding-out occurs if the federal government extends its control over resources by: (a) additional taxation to eliminate a budget deficit. (b) issuing U.S. Treasury bonds to cover a budget deficit. (c) printing monetary base to cover a deficit. (d) confiscation and direct regulation.
Ralph Byrns
Chapter 31 / 15: Budget Deficits and National Debt
Test Bank Two
13
65) BM31 \ C \\ Absorption Equation \ 2 \\ In symbols, the absorption equation is written: (a) C + I + G + X M = C + S + T. (b) G = T + B + MB. (c) G T = [S I] + [X M]. (d) GDP CCA IBT = GNI. (e) PV = A/i. (f) MV = PQ. 66) BM31 \ C \\ Absorption Equation \ 2 \\ If domestic saving and investment are constant, rising federal budget deficits yield: (a) lower interest rates. (b) higher tax rates. (c) growing trade deficits. (d) reduced public debt. 67) BM31 \ C \\ Absorption Equation \ 3 \\ The U.S. federal budget deficit equals the trade deficit plus the: (a) domestic investment surplus. (b) money multiplier. (c) domestic saving surplus. (d) money supply. (e) public debt. 68) BM31 \ A \\ Absorption Equation \ 3 \\ If the federal government runs a growing deficit, while U.S. investment is growing and private U.S. saving is declining, there will tend to be growth in: (a) imports relative to exports. (b) foreign investments by U.S. firms. (c) U.S. balance of payments surpluses. (d) foreign government bonds held by Americans. 69) BM31 \ D \\ Absorption Equation \ 3 \\ All else equal, federal budget deficits cannot be financed in part by: (a) increasing domestic saving. (b) reducing exports. (c) obtaining the savings of foreigners. (d) reducing imports. (e) reducing domestic investment.
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