__________________________ Name: Date: _____________ 1. The factors most responsible for forecasts of the U.S. government debt spiraling out of control in the next half century are the projected: A) slowdowns in the rates of technological change and human capital growth. B) decrease in high-skilled domestic workers and the increase in immigration of lowskilled workers into the United States. C) aging of the U.S. population and rising health care costs. D) increase in international competition and the outsourcing of U.S. job. 2. An increase in the elderly population of a country affects fiscal policy most directly because: A) the elderly generally are not required to pay taxes. B) governments provide pensions and health care for the elderly. C) the elderly favor high interest rates on their savings. D) governments spend more on education as the proportion of the elderly increases. 15-2 Problems in Measurement 3. Current measures of the U.S. federal government's budget deficit account for all of the following except: A) government expenditures. B) government revenues. C) changes in government indebtedness. D) changes in government capital assets. 4. The debt of the United States government is underreported in the view of many economists because all of the following liabilities are excluded except: A) future pensions of government employees. B) debt owed to foreigners. C) future Social Security benefits. D) government guarantees of student loans. 5. According to the traditional view, if taxes are cut without cutting government spending, then the short-run effects will be: A) higher output and lower unemployment. B) higher output and higher unemployment. C) no change in output or unemployment. D) no change in output and higher unemployment.
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6. Ricardian equivalence refers to the same impact of financing government: A) whether by printing money or raising taxes. B) in the long run as in the short run. C) whether by debt or taxes. D) in an open economy as in a closed economy. 7. The logic of Ricardian equivalence implies that: A) tax cuts do not influence consumer spending but changes in government spending do. B) neither tax cuts nor changes in government spending affect consumer spending. C) tax cuts combined with future decreases in government spending will decrease consumer spending. D) if the government cuts taxes and increases current government spending, consumer spending will increase. 8. According to the theory of Ricardian equivalence, if are consumers forward-looking, they will view a tax cut that has no plans to reduce government spending as ______, so their consumption will ______. A) additional disposable income; increase. B) additional disposable income; remain unchanged. C) a rescheduling of taxes into the future; increase. D) a rescheduling of taxes into the future; remain unchanged. 9. A debt-financed tax cut will ______ current consumption in the traditional view and ______ current consumption in the view of Ricardian equivalence. A) increase; increase B) increase; decrease C) increase; not change D) decrease; decrease 10. The Ricardian view on fiscal policy makes less sense if people are: A) rational and foresighted. B) shortsighted and not fully rational. C) able to plan for the future. D) able to borrow without constraint.
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11. Assume that nobody cares about the economic well-being of future generations. Then the Ricardian equivalence view of the effect of debt-financed tax cuts is: A) totally invalid. B) still fully valid because the government has the option to levy taxes to pay off the full debt in just a few years. C) still fully valid as long as the government cuts spending also. D) still partially valid because most of the taxpayers will live and pay taxes for a substantial number of years after the tax cut. 12. In response to a tax cut, the consumption of a consumer who is borrowing-constrained ______, whereas the consumption of a forward-looking unconstrained consumer acting in accord with Ricardian equivalence ______. A) increases; increases B) increases; remains unchanged C) remains unchanged; remains unchanged D) remains unchanged; increases 13. From the Ricardian point of view, a consumer should not raise his or her consumption when taxes are cut but government spending is not cut because: A) the government is going to raise taxes by exactly as much as the cut in the next year. B) the government is going to raise taxes by exactly as much as the cut plus interest in the next year. C) the government is sure to raise taxes by an amount equal in present value to the debt incurred this year, sometime in the taxpayer's lifetime. D) even if the government does not raise enough extra taxes during the taxpayer's lifetime to pay off, in present value, the debt incurred this year, the taxpayer should make provision for the taxes that will be levied on his or her heirs.
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Answer Key
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. C B D B A C A D C B D B D
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