Chapter 19. Government Debt and Budget Deficits

Chapter 19. Government Debt and Budget Deficits 1.When a government spends more than it collects in taxes, it runs a: A) trade deficit. B) trade surplus. C) budget surplus. D) budget deficit. 2.Government debt equals the: A) difference between current government purchases and taxes. B) difference between saving and investment. C) sum of past budget deficits and surpluses. D) M1 money supply. 3.The amount by which government spending exceeds government revenues is called the , and the accumulation of past government borrowing is called the . A) deficit; debt B) debt; deficit C) devaluation; deflation D) deflation; devaluation 4.The government budget deficit is the , and government debt is the . A) amount by which imports exceed exports; amount by which government spending exceeds government revenue B) amount by which government spending exceeds government revenue; amount by which imports exceed exports C) amount by which government spending exceeds government revenue; accumulation of past government borrowing D) accumulation of past government borrowing; amount by which government spending exceeds government revenue 5.If the debt of the U.S. federal government in 2008 was divided equally among the people in the United States, then the debt per person would equal approximately: A) $3,500. B) $35,000. C) $53,000. D) $153,000. 6.Compared to the size of government debt as a percentage of GDP in other major industrial countries, the federal government of the United States: A) is one of the most heavily indebted governments. B) has accumulated a relatively small debt. C) has accumulated somewhat greater than average debt. D) is one of the least indebted governments. 7.Historically, the primary cause of increases in government debt is: A) printing too much money. B) cutting taxes. C) increasing interest rates. D) financing wars. 8.The large increase in U.S. government debt between 1980 and 1995 was unusual because it occurred: A) during peacetime. B) during an extended recessionary period. C) without increased government spending. D) without tax cuts. 9.Relative to the size of GDP, the U.S. federal government debt was at its maximum: A) at the end of the Revolutionary War. B) at the end of the Civil War. C) at the end of World War II. D) following the 9/11 terrorist attacks in 2001. 10.Holding other factors constant, the ratio of government debt to GDP can decrease as a result of any of the following changes except: A) decreases in government spending. B) increases in GDP. C) decreases in tax revenues. D) decreases in transfer payments. 11.If government debt is not changing, then: A) the economy is at long-run equilibrium. B) the government's budget must be balanced. C) GDP must equal the natural rate of output. D) capital per worker is constant. 12.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 low- skilled 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. jobs. 13.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. 14.Which of the following is the most likely explanation of the August 2011 decision by Standard and Poor's to reduce its credit rating on U.S. government bonds? A) A U.S. government debt default was not a likely outcome, but was a possibility to occur in the short term. B) The U.S. government budget deficit was too large. C) Strategies to reduce predicted U.S. government future budget deficits did not appear likely, making default a possibility. D) Foreign governments were no longer willing to lend to the U.S. government. 15.In a time of inflation when the government budget is balanced in the conventional sense, the real (i.e., deflated) value of the government debt is: A) growing at the rate of inflation. B) growing, but at a rate less than the rate of inflation. C) constant. D) decreasing at the rate of inflation. 16.In a time of inflation when the real (i.e., deflated) value of the government debt is constant, then the conventionally: A) reported government budget will show a deficit equal to the inflation rate times the outstanding debt. B) reported government budget will show a deficit equal to less than the inflation rate times the outstanding debt. C) reported government budget will be balanced. D) measured government budget will show a surplus equal to the inflation rate times the outstanding debt. 17.Assume that the nominal interest rate is 11 percent, the inflation rate is 8 percent, and government debt at the beginning of the year equals $4 trillion. By how much is the government budget deficit overstated as a result of inflation? A) $0.12 trillion B) $0.32 trillion C) $0.44 trillion D) $0.80 trillion 18.A deficit adjusted for inflation should include only government spending used to make interest payments. A) real B) nominal C) foreign D) domestic 19.If the government debt, D, equals $5 trillion, the nominal interest rate is 7 percent, and the real interest rate is 3 percent, then nominal budget deficit overstates the real deficit by $ trillion. A) 0.35 B) 0.20 C) 0.15 D) 0.07 20.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. 21.If capital budgeting procedures were employed, then a budget deficit would be measured as: A) the sum of government debt. B) the change in government debt. C) the change in government debt minus the change in government capital assets. D) the change in government capital assets. 22.When the federal government incurs additional debt to acquire an asset, under current budgeting procedures the deficit , while under capital budgeting procedures the deficit . A) does not change; increases B) increases; does not change C) does not change; decreases D) decreases; does not change 23.Capital budgeting is a procedure that: A) adjusts the deficit for inflation. B) estimates what the deficit would be if the economy were operating at the natural rate of output.