1 Chapter 11 More on Government Spending and Taxes: Beyond Fiscal Policy 1. If the consumption of a good by one person reduces the amount of it that can be consumed by others, the good is a. excludable. b. nonexcludable. c. rivalrous in consumption. d. nonrivalrous in consumption. ANS: c 2. The public debt is a. approximately equal to GDP. b. larger than GDP. c. smaller than GDP. d. the amount of overspending done by the federal government on an annual basis. ANS: c 3. Who bears the burden of the public debt? a. the government, because it is the entity that is in debt b. most likely future generations c. most likely the current generation d. current or future generations, depending upon whom you are talking to ANS: d 4. Concerning the public debt, the “we owe it to ourselves” argument refers to the idea that a. we owe it to ourselves to pay off this debt as soon as possible. b. we had better stop selling debt instruments to foreigners so that we will ultimately just owe it to ourselves. c. if we were to pay off the debt, then some Americans would be paying other Americans. d. since we individuals comprise the government, we actually owe the money to ourselves. ANS: c 5. Concerning the public debt, the “current generation bears the burden of the debt” argument could be stated as a. we are the ones who benefit from the monies borrowed and spent by the government on our behalf, therefore we should pay the debt. b. when the government borrows and spends, it means that fewer resources are available to produce other products. c. future taxpayers will end up paying the debt when it comes due. d. today’s taxpayers (the current generation) are paying off previous generations’ debts. ANS: b 34
35 Chapter 11 6. Suppose the federal government runs a $200 billion deficit in year 1 that increases the public debt from $2,000 billion to $2,200 billion by year’s end. During year 1 the price level rises by 10 percent. What is the “real” deficit in year 1? a. $200 billion b. zero dollars ($0) c. $100 billion d. $50 billion ANS: b 7. If the government runs a deficit during a year in which there is inflation, the real deficit is a. greater than the conventionally measured deficit. b. less than the conventionally measured deficit. c. negative. d. zero. ANS: b 8. Suppose that the public debt is currently $1,000 billion and that during the course of the next year the government incurs a budget deficit of $100 billion. Also assume that during the next year the inflation rate is 4 percent. The nominal public debt will increase by __________ billion, the real value of the public debt will decrease by __________ billion, and the real deficit will be __________ billion. a.
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