Question 1

A budget deficit is defined as:

Accepted Answer

A)  a shortfall of revenues compared to expenditures.
B)  a shortfall of expenditures compared to revenue.
C)  accumulated deficits minus accumulated surpluses.
D)  accumulated surpluses minus accumulated deficits.

Question 2

Budget deficits contribute to higher debt.

Accepted Answer

A) True 
 B)False

Question 3

If the nominal deficit is $100 billion, inflation is 10 percent, and total debt is $2 trillion, then the real deficit is:

Accepted Answer

A)  -$20 billion (a surplus) .
B)  -$100 billion (a surplus) .
C)  $20 billion.
D)  $100 billion.

Question 4

The cyclical surplus is $450 billion, potential output is $10 trillion and tax rate is 15 percent.With this information, we can infer that the actual output of this economy is:

Accepted Answer

A)  $13 trillion.
B)  $13.5 trillion.
C)  $6 trillion.
D)  $6.5 trillion.

Question 5

As the interest rate rises, debt service:

Accepted Answer

A)  decreases.
B)  does not change, but debt increases.
C)  increases.
D)  does not change and neither does the debt.

Question 6

Much of the U.S.debt is held internally.

Accepted Answer

A) True 
 B)False

Question 7

Debt is measured relative to GDP because:

Accepted Answer

A)  the ability of a country to pay off its debt depends on its productive capacity.
B)  the ability to produce output depends on the size of the nation's debt.
C)  GDP is always used as a reference point in economics.
D)  as long as this ratio remains high, the government will have no trouble repaying the debt.

Question 8

In the long-run framework, budget surpluses:

Accepted Answer

A)  should be run whenever output dips below potential output.
B)  should never be run since they crowd out investment in the short run.
C)  are better than budget deficits over the long run because unlike budget deficits, they increase saving and investment.
D)  should be run on a permanent basis since they boost saving and investment and stimulate economic growth.

Question 9

If the nominal deficit is $200 billion, the real deficit is $150 billion, and total debt is $2 trillion, then inflation is:

Accepted Answer

A)  1 percent.
B)  2.5 percent.
C)  4 percent.
D)  5 percent.

Question 10

External debt rises from 5 percent of GDP to over 30 percent of GDP.This increase in external debt:

Accepted Answer

A)  is not a potential problem because repayment does not imply a net reduction in the income of an average citizen.
B)  is not a potential problem because government debt differs from the debt of individuals.
C)  is a potential problem because government debt is no different from the debt of individuals.
D)  is a potential problem because repayment implies a net reduction in the income of an average citizen.

Question 11

Bond holders:

Accepted Answer

A)  lose when actual inflation equals expected inflation.
B)  gain when actual inflation is more than was expected.
C)  do not lose when the expected inflation built into the nominal interest rate is correct.
D)  do not lose when the expected inflation built into the nominal interest rate is lower than actual inflation.

Question 12

In order to calculate the real deficit, economists need to know the:

Accepted Answer

A)  nominal deficit and the rate of inflation.
B)  rate of inflation and the debt.
C)  rate of inflation, the debt, and the nominal deficit.
D)  rate of inflation, the debt, and the real interest rate.

Question 13

A government can finance its budget deficit by doing all of the following except:

Accepted Answer

A)  buying bonds.
B)  borrowing from its central bank.
C)  selling bonds.
D)  printing money.

Question 14

If government has no debt initially but then has annual revenues of $1.5 billion for 10 years and annual expenditures of $1.6 billion for 10 years, then the government has a:

Accepted Answer

A)  deficit of $100 million per year and a debt of $1 billion.
B)  surplus of $100 million per year and a debt of $1 billion.
C)  deficit of $100 million and a debt of $1 billion per year.
D)  surplus of $100 million and a debt of $1 billion per year.

Question 15

If actual income is $300 billion, potential income is $350 billion, the total surplus is $20 billion, and tax revenue increases with income, then the cyclical deficit can be any of the following except:

Accepted Answer

A)  zero.
B)  $1 billion.
C)  $10 billion.
D)  $20 billion.

Question 16

Say the economy is at its potential income at $8 trillion and the deficit is $200 billion.The structural deficit:

Accepted Answer

A)  is $200 billion.
B)  could be less than $200 billion.
C)  could be more than $200 billion.
D)  cannot be determined from the given information.

Question 17

The cyclical deficit is $400 billion, potential output is $9 trillion and the tax rate is 16 percent.With this information, we can infer that the actual output of this economy is:

Accepted Answer

A)  $6 trillion.
B)  $11.5 trillion.
C)  $6.5 trillion.
D)  $9 trillion.

Question 18

If taxes and government expenditures were constant and did not vary with income, then:

Accepted Answer

A)  cyclical deficits would increase.
B)  cyclical deficits would not exist.
C)  structural deficits would increase.
D)  structural deficits would not exist.

Question 19

If actual income is $300 billion, potential income is $350 billion, the total deficit is $20 billion, and tax revenue increases with income, then the structural deficit can be any of the following except:

Accepted Answer

A)  zero.
B)  $1 billion.
C)  $10 billion.
D)  $20 billion.

Question 20

If Japan's debt level is much higher than that of the United States, the United States has more flexibility to run deficits.

Accepted Answer

A) True 
 B)False

Exam 31: Deficits and Debt: the Austerity Debate

Bond holders:

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In order to calculate the real deficit, economists need to know the:

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Say the economy is at its potential income at $8 trillion and the deficit is $200 billion.The structural deficit:

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The cyclical surplus is $450 billion, potential output is $10 trillion and tax rate is 15 percent.With this information, we can infer that the actual output of this economy is:

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If actual income is $300 billion, potential income is $350 billion, the total deficit is $20 billion, and tax revenue increases with income, then the structural deficit can be any of the following except:

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Budget deficits contribute to higher debt.

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If Japan's debt level is much higher than that of the United States, the United States has more flexibility to run deficits.

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Much of the U.S.debt is held internally.

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If taxes and government expenditures were constant and did not vary with income, then:

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External debt rises from 5 percent of GDP to over 30 percent of GDP.This increase in external debt:

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If the nominal deficit is $200 billion, the real deficit is $150 billion, and total debt is $2 trillion, then inflation is:

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As the interest rate rises, debt service:

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If actual income is $300 billion, potential income is $350 billion, the total surplus is $20 billion, and tax revenue increases with income, then the cyclical deficit can be any of the following except:

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In the long-run framework, budget surpluses:

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If the nominal deficit is $100 billion, inflation is 10 percent, and total debt is $2 trillion, then the real deficit is:

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Debt is measured relative to GDP because:

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The cyclical deficit is $400 billion, potential output is $9 trillion and the tax rate is 16 percent.With this information, we can infer that the actual output of this economy is:

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If government has no debt initially but then has annual revenues of $1.5 billion for 10 years and annual expenditures of $1.6 billion for 10 years, then the government has a:

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A budget deficit is defined as:

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A government can finance its budget deficit by doing all of the following except:

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