CH-12 Federal Budgets and Public Policy – Macroeconomics: A Contemporary Introduction : Exam Guide

Chapter 12—Federal Budgets and Public Policy 1. Transfer payments are included in the government budget deficit but not included in the government purchases component of GDP. A. True B. False 2. Government purchases of goods and services are not included in the government budget deficit but are included in the government purchases component of GDP. A. True B. False 3. The largest category of federal government expenditures is A. national defense B. interest on the federal debt C. direct benefit payments to individuals D. grants to states and localities E. capital expenditures 4. The U.S. government's fiscal year covers from A. January through December B. April of one year through March of the next year C. June of one year through May of the next year D. September of one year through August of the next year E. October of one year through September of the next year 5. The federal government's fiscal year A. is less than a calendar year in length B. runs from October 1 to September 30 C. runs from January 1 to December 31 D. is actually 15 months in length E. none of the above 6. Approximately what proportion of the U.S. federal budget was spent on national defense in 2012? A. 10 percent B. 20 percent C. 40 percent D. 50 percent E. 60 percent 7. Approximately what percentage of the U.S. federal budget was used for interest payments (on the national debt) in 2012? A. 5 percent B. 10 percent C. 14 percent D. 25 percent E. 40 percent 8. Approximately what percentage of the U.S. federal budget was used for Social Security payments (on the national debt) in 2012? A. 5 percent B. 10 percent C. 14 percent D. 20 percent E. 40 percent 9. Approximately what percentage of the U.S. federal budget was used for Medicare payments (on the national debt) in 2012? A. 5 percent B. 10 percent C. 12 percent D. 20 percent E. 40 percent 10. Approximately what percentage of the U.S. federal budget was used for Welfare payments (on the national debt) in 2012? A. 5 percent B. 10 percent C. 15 percent D. 20 percent E. 30 percent 11. The federal government budget is A. a year-end record of how much the government received in income and how much it spent B. a plan for government expenditures and revenues for the coming year C. always in balance: receipts must equal expenditures D. equal to government receipts minus government expenditures E. usually planned for the calendar year: January through December 12. The U.S. federal budget is determined exclusively by Congress. A. True B. False 13. Other things equal, an increase in defense spending will increase the budget deficit. A. True B. False 14. The Budget of the United States Government is officially submitted by A. the President to the Congress and contains proposals for government expenditures B. the Congress to the President and contains proposals for government expenditures C. the President to the Congress and contains proposals for tax increases D. the Congress to the President and contains proposals for tax increases E. the President to the Congress and it is reviewed by the Supreme Court 15. The President's budget is presented to Congress each year A. in the Economic Report of the President B. in a report followed shortly by the Economic Report of the President C. at the beginning of the fiscal year D. in a form that must be voted up or down within 60 days E. and requires a two-third vote for ratification 16. The Employment Act of 1946 A. created the Council of Economic Advisers B. established the Office of Management and Budget C. centralized budgetary authority by establishing budget committees in the House and Senate D. established the goal of a balanced budget E. weakened the role of Congress in the budgetary process 17. The entire U.S. federal budget process, beginning with delivery of the President's budget to Congress and ending with the beginning of the fiscal year, takes about A. one month B. six months C. nine months D. one year E. three months 18. Which of the following was not part of the legislation passed in 1921 changing the budgetary process? A. presidential involvement in writing the budget B. establishment of the Office of Management and Budget C. creation of an agency to evaluate budget requests D. creation of an agency to help the President formulate budget proposals E. creation of the Council of Economic Advisers 19. The annual Economic Report of the President is written by A. the President B. Congress C. the Office of Management and Budget D. the Council of Economic Advisers E. the Secretary of the Treasury 20. Which institution was created under the Employment Act of 1946 to assist the President in formulating an appropriate fiscal policy? A. the Council of Economic Advisers B. the Board of Governors of the Fed C. the Office of Management and Budget D. the Fed's Open Market Committee E. the Department of Commerce 21. The beginning of the formal budget process is signified by A. Congress's submission to the President of the Budget of the United States B. the submission of the Economic Report of the President to Congress C. the President's submission to Congress of the Budget of the United States D. passage of a budget resolution by Congress E. the President signing the budget into law 22. Which of the following is true of an increase in a federal government budget surplus? A. When the surplus increases, revenues rise less than expenditures. B. The aggregate demand curve shifts rightward as a result of an increasing surplus. C. The unemployment rate falls as a result of an increasing surplus. D. Such an increase in the surplus might close an expansionary gap. E. The natural rate of unemployment increases as a result of an increasing surplus. 23. The Council of Economic Advisers was created by A. the same legislation which created the Federal Reserve Board B. President John F. Kennedy C. the Employment Act of 1946 D. the Office of Management and Budget E. Congress in 1921 24. It is possible for the budget deficit to change even if there is no change in discretionary fiscal policy. A. True B. False 25. It is impossible for the budget deficit to change unless there is a change in discretionary fiscal policy. A. True B. False 26. A continuing resolution provides authorization for continuing agency operation even after its budget has expired. A. True B. False 27. Only about one-fourth of the federal budget involves expenditure categories determined by existing obligations and laws (e.g., interest on the national debt, Social Security, and Medicare). A. True B. False 28. Almost one-half of federal spending consists of cash and "in kind" payments to individuals. A. True B. False 29. The federal government spends more for national defense than for anything else. A. True B. False 30. About three-quarters of the federal budget involves expenditure categories that are fixed by law (e.g., Social Security) and cannot readily be changed. A. True B. False 31. Continuing resolutions are legislative actions undertaken to balance the budget. A. True B. False 32. Federal spending (including transfer payments), as a percent of GDP, A. has remained largely unchanged over the last 50 years B. has exceeded 10 percent only in wartime periods C. is less than half of state and local government spending D. has increased since 1921 E. has greatly diminished in recent years 33. A continuing resolution A. shuts down government agencies in the absence of an approved budget B. allows agencies to spend at the rate of the previous year in the absence of an approved budget C. enables Congress to override the President's budget D. contributes to the efficiency of the federal budget process E. is seldom used 34. When a budget is not approved in time for continued agency operation, A. a continuing resolution is frequently used B. a budget resolution must be developed C. the agency usually shuts down D. the President can force Congress to act E. the agency must borrow from the Federal Reserve 35. Which of the following is not a problem with the U.S. federal budget process? A. the congressional committee framework B. the lengthy budget process C. the failure to meet deadlines D. the lack of detail in the budget E. the portion of the budget over which Congress and the President have little control 36. Problems with the budget process include the fact that A. all of the following B. frequently missed timetables result in continuing resolutions replacing budgets C. budgets are frequently overly detailed D. much of federal spending is uncontrollable E. overlapping budget authorities exist across committees 37. Approximately __________ of the budget falls into expenditure categories that are determined by existing law. A. one-fourth B. one-third C. half D. two-thirds E. three-quarters 38. Approximately __________ of the budget falls into expenditure categories that are not determined by existing law. A. one-fourth B. one-third C. half D. two-thirds E. three-quarters 39. Problems with the federal government budget process include A. Congressional adoption of a budget outline that allows the President too much discretion in spending decisions B. a streamlined Congressional committee structure that speeds the process and reduces uncertainty about funding C. continuing resolutions that allow agencies to continue operating despite being abolished by Congress D. most of the expenditures are for entitlement programs E. a brief budget process that does not allow Congress to study whether the budget is an appropriate tool for activist fiscal policy 40. Problems with the federal government budget process include A. the use of continuing resolutions that reward last year's programs without adequate review of performance B. Congress having too much control over the budget since most government programs can be cut at any time C. a short review period in Congress that results in poor choices in funding programs D. a detailed revenue analysis that allows Congress to reward political favors through tax increases E. the President's constitutional power to cancel any proposed expenditure without the possibility of a Congressional override 41. Problems with the federal government budget process include A. Congress having to make tough choices each year on which entitlement programs, if any, will receive full support and how much partial support all others will receive B. the constitutional requirement that Congress balance the budget on an annual basis C. an overly detailed budget that allows Congress to reward friends, thereby discouraging restraint on spending D. a speedy process that causes errors that are expensive to correct E. continuing resolutions that force Congress to face tough budgetary decisions in a timely manner 42. A continuing resolution is A. an annual determination on the part of Congress to improve the budget process B. a decision to maintain a specific spending level for five years C. a temporary extension of spending authority into the new fiscal year D. the official name for the entire budget package when it is finally enacted E. the result of a budget surplus 43. One proposal for improving the budget process is to A. switch to a two-year or biennial budget B. remove the Council of Economic Advisers from the process C. require more detail in the various line items of the budget D. provide for automatic annual increases in all budget categories E. eliminate the role of Congressional committees in the process 44. With few exceptions, the U.S. federal government has historically run a balanced budget. A. True B. False 45. With few exceptions, the U.S. federal government has historically run a deficit. A. True B. False 46. The federal budget has been in deficit in all but 9 years since 1960. A. True B. False 47. Since 1960 the federal budget has been in surplus in only 9 years. A. True B. False 48. If for every dollar increase in farm subsidies the government decreased urban welfare payments by a dollar, we would expect the net effect to be A. an increase in the budget deficit because government spending has increased B. a decrease in the budget deficit because transfer payments are not included in the government's budget C. an increase in the budget deficit because transfer payments have increased D. an increase in the budget deficit because farm subsidies are transfer payments but urban welfare payments are not E. no change in the budget deficit 49. If government increased Social Security benefits and decreased the salaries of government workers by the same amount, we would expect the immediate effect to be A. an increase in the budget deficit and in government purchases of goods and services B. an increase in the budget deficit but no change in government purchases of goods and services C. an increase in the budget deficit and a decrease in government purchases of goods and services D. no change in the budget deficit because there has been no change in government purchases of goods and services E. no change in the budget deficit because government purchases of goods and services have decreased by the same amount as transfer payments have increased 50. If the government increased defense spending by $1 million and laid off enough Justice Department employees to decrease the Department of Justice budget by $1 million, we would expect the net effect to be A. an increase in the budget deficit and in transfer payments B. an increase in the budget deficit and in net taxes C. an increase in the budget deficit and in government spending D. no change in the budget deficit because there is no net change in government spending E. no change in the budget deficit because neither defense spending nor the Department of Justice is included in government spending 51. If the U.S. government spent $20 million paying people to dig holes in 2005, and then spent $30 million paying the same people to fill the holes up again that same year, we would expect the net effect to be a(n) A. decrease in transfer payments B. increase in the budget deficit as transfer payments increased C. increase in the budget deficit as government purchases of goods and services increased by $50 million D. increase in the budget deficit as government purchases of goods and services increased by $30 million E. $10 million dollar increase in the budget deficit 52. Suppose that government purchases of goods and services increase by $200 and at the same time lump-sum taxes are increased by $200. (It is important to note that income tax rates do not change.) Which of the following is true? A. Whether the budget deficit increases or decreases will depend on the value of the MPC. B. The budget deficit will increase by $200. C. The budget deficit will increase by $400. D. The budget deficit will decrease as the economy expands. E. There will be no change in the budget deficit. 53. Some economists argue that federal government capital projects, which offer benefits over a number of years, should be financed over a number of years and therefore involve deficit finance. A. True B. False 54. One rationale for the sizable wartime deficits run by the U.S. government is that the alternative to defending the country from an aggressor may involve substantial long-term costs. A. True B. False 55. The budget deficit tends to decline during periods of recession and to increase during periods of economic recovery. A. True B. False 56. The federal budget deficit becomes __________ during recessions because __________. A. smaller; transfer payments increase and tax revenues decline B. larger; transfer payments increase and tax revenues decline C. larger; both transfer payments and tax revenues increase D. smaller; both transfer payments and tax revenues increase E. smaller; both transfer payments and tax revenues decrease 57. The federal budget deficit becomes __________ during expansions because __________. A. smaller; transfer payments decrease and tax revenues increase B. larger; transfer payments decrease and tax revenues increase C. larger; both transfer payments and tax revenues increase D. smaller; both transfer payments and tax revenues increase E. smaller; both transfer payments and tax revenues decrease 58. Because of automatic stabilizers, government budget deficits are A. positive during both expansions and contractions B. negative during both expansions and contractions C. zero if averaged out over the entire business cycle D. larger during expansions and smaller during contractions E. smaller during expansions and larger during contractions 59. In Keynes’ philosophy of government budgets, A. permanent deficits are desirable B. permanent surpluses are desirable C. the goal is to have a budget surplus D. surpluses are appropriate during recessions E. deficits are appropriate during recessions 60. In Keynes’ philosophy of government budgets, A. permanent deficits are desirable B. permanent surpluses are desirable C. the goal is to have a budget surplus D. surpluses are appropriate during expansions E. deficits are appropriate during expansions 61. The accepted philosophy on U.S. federal deficits prior to the Great Depression was that A. the budget should be balanced cyclically B. a budget deficit does not matter as long as the economy is at full employment C. the budget should be annually balanced D. the budget should never be balanced E. deficits do not matter 62. Which of the following has been advanced as a legitimate reason for federal budget deficits? A. Both c and d are legitimate reasons for government budget deficits. B. All of the following. C. Deficits help reduce the size and duration of recessions through the automatic stabilizers. D. Deficits have been used to finance capital projects. E. If the government had to fund all of its programs with tax revenues, the programs wouldn't get funded. 63. John Maynard Keynes is best known for advocating A. a policy of annually balancing the budget B. deficit spending by the federal government during recessions C. the fixed-growth-rate monetary rule D. adoption of the biennial budget process E. an active monetary policy to prevent inflation 64. In order for the government to increase spending, it must increase taxes to finance that spending. A. True B. False 65. Biannual budgets have replaced the annual budget process for the federal government. A. True B. False 66. An annually budgeted budget can only be met if automatic stabilizers are effective. A. True B. False 67. If a budget is cyclically balanced, the government should run a surplus when the economy experiences a contractionary gap. A. True B. False 68. If a budget is cyclically balanced, the government should run a surplus when the economy experiences an expansionary gap. A. True B. False 69. The functional finance philosophy is based on the idea that balancing the federal budget is less important than using it to promote an economy operating to its potential. A. True B. False 70. If the functional finance approach to federal budgeting is used, the federal government's budget deficit should be zero. A. True B. False 71. During a recession, higher welfare outlays A. increase the size of the budget deficit even if the government does not undertake discretionary fiscal policy B. decrease the size of the budget deficit regardless of the government's discretionary fiscal policy C. increase the size of the budget deficit only if the government undertakes discretionary fiscal policy D. decrease the size of the budget deficit only if the government undertakes discretionary fiscal policy E. have the same effect on the budget deficit as they do in times of expansion 72. In the United States since the Great Depression, the federal government has A. run budget deficits only in periods of recession B. run a budget deficit in almost every year C. practiced a policy of annually balancing the budget D. run budget deficits only in wartime E. run a surplus in most years 73. Federal budget deficits grow during recessions because A. both tax revenues and transfer payments decrease B. both tax revenues and transfer payments increase C. tax revenues decrease while transfer payments increase D. tax revenues increase while transfer payments decrease E. tax revenues decrease but transfer payments are unchanged 74. Which of the following is true of an annually balanced federal budget? A. Most economists agree that the federal government should balance its budget just as each household must do. B. Such a policy would require government to increase its spending when tax receipts fell. C. Such a policy became popular between the 1930s and 1960s. D. Such a policy would guarantee that the economy always remained at its potential level. E. Such a policy could worsen a contractionary gap. 75. A disadvantage of having an annually balanced budget is that government spending would have to A. increase in recessions and decrease during expansions B. decline during a recession to offset the increase in tax revenues C. rise during a recession to match the increase in tax revenues D. rise during an expansion to offset the decline in tax revenues E. decline in a recession to match the decrease in tax revenues 76. If government budgets were required to be annually balanced, A. both d and e B. income taxes could no longer be used C. either government spending would have to fall or tax rates would have to increase during recessions D. the government budget would have a greater stabilizing component E. the automatic stabilizers would work better 77. If the government runs a cyclically balanced budget, its revenue will equal its expenditure A. each year B. at each phase of the business cycle C. over the course of the business cycle D. only during expansions E. only during recessions 78. Which of the following best describes the philosophy of functional finance? A. The federal budget should be balanced each year. B. A federal budget deficit should be permitted only during a business expansion. C. A federal budget deficit should be permitted only during a recession. D. Policy makers should focus on keeping the unemployment rate at the natural rate, even if this means budget deficits. E. Policy makers should be less concerned about budget deficits and more concerned with increasing the natural rate of unemployment. 79. According to the functional finance budget philosophy, A. deficits should never be used to stimulate the economy B. automatic stabilizers should be eliminated C. the government budget should be whatever is necessary to have the economy operate at potential GDP D. each government spending program should be financed on the basis of its function E. the federal budget should be balanced in the long run 80. Cyclical budget deficits refer to A. the fact that deficits increase during expansions and decrease during contractions B. the fact that deficits increase during contractions and decrease during expansions C. the size of the deficit after the economy has gone through a complete business cycle D. the size of the deficit when the economy is at potential GDP E. none of the above 81. According to the budget philosophy of functional finance, A. the budget should be balanced annually B. surpluses should be run during periods of prosperity and deficits should be run during recessions C. the government should not worry about whether the budget is balanced but worry instead about reaching the potential output level D. the budget should never be in balance, no matter what E. the rate of growth in the national debt should equal the rate of growth in the money supply 82. An annually balanced budget A. is the surest path to economic stability B. is required by the U.S. Constitution C. dampens cyclical swings by decreasing government spending during expansions and increasing it during recessions D. accentuates cyclical swings by increasing government spending during expansions and reducing it during recessions E. is a goal that has only been achieved twice in the past 5 years 83. During the Reagan presidency, tax rates were cut, government revenues fell below expectations, and there was a then-historic peacetime deficit. A. True B. False 84. It took more than 200 years for the federal debt to reach $1 trillion. A. True B. False 85. It took more than 200 years for the federal debt to reach $1 trillion and then only an additional 30 years to increase seven fold. A. True B. False 86. The most rapid period of growth of the federal debt in the past 50 years was the 15 year period beginning just after World War II ended. A. True B. False 87. What has been the practical effect on macroeconomic policy of the huge U.S. federal budget deficits of the 1980s? A. The automatic stabilizers no longer functioned. B. It was tough gaining support to cut taxes or raise government purchases of goods and services during cyclical downturns. C. Monetary policy has become less useful than fiscal policy because the deficits are so large that they have a greater impact than the money supply. D. There has been more emphasis on fine-tuning the economy than there was previously. E. There is now a consensus among economists that a balanced budget amendment should be adopted. 88. In 1981, policy makers in the Reagan administration predicted a balanced budget for the 1980s because A. the budget included a decrease in defense expenditures B. the budget included an increase in the tax rate C. the budget included an increase in unspecified government spending D. growth in GDP was expected to be large enough to lead to an increase in tax revenues despite the tax cut E. growth in GDP was expected to be small enough to require less government spending 89. Which of the following would decrease the size of a federal budget deficit? A. a recession B. an increase in defense spending C. growth in real GDP D. a decrease in taxes E. an increase in transfer payments 90. Which of the following statements about the tax cut enacted in 1981 during the Reagan administration is correct? A. The tax cut caused the recession of 1982. B. The tax cut and the recession of 1982 combined to produce one of the largest peace-time deficits ever experienced up to that time. C. The tax cut stimulated a large increase in economic activity and led directly to the balanced budget of 1982. D. The tax cut was opposed by the "supply side" economists in President Reagan's administration. E. The tax cut was favored by Congress but opposed by the President and passed over his veto. 91. Until 1980, the national debt was mostly the result of A. wartime borrowing B. inflation C. bad monetary policy D. wasteful Congressional spending E. Social Security obligations 92. A possible explanation for the persistence of the U.S. federal budget deficits is that A. it is easier politically to increase government spending than to decrease taxes B. it is easier politically to decrease government spending than to decrease taxes C. it is easier politically to increase government spending than to increase taxes D. the economy naturally tends toward recessions E. the economy naturally tends toward full employment 93. If the automatic stabilizers are creating budget deficits, the economy must be experiencing falling output. A. True B. False 94. If discretionary fiscal policy creates a federal budget deficit, the economy must be experiencing falling output. A. True B. False 95. If aggregate output is falling, A. both b and e B. tax revenue increases C. automatic stabilizers will tend to increase the size of the deficit D. automatic stabilizers will tend to decrease the size of the deficit E. transfer payments decrease as fewer people become eligible for public assistance 96. If aggregate output is increasing, A. both b and e B. tax revenue decreases C. automatic stabilizers will tend to increase the size of the deficit D. automatic stabilizers will tend to decrease the size of the deficit E. transfer payments increase as fewer people become eligible for public assistance 97. Actual federal budgets are not an accurate measure of discretionary fiscal policy because A. it is difficult to measure government spending accurately B. people cheat on their income taxes C. even without changes in fiscal policy, budget deficits increase during expansions D. even without changes in fiscal policy, budget deficits increase during recessions E. earlier administrations may have contributed to current budget deficits 98. If the deficit is increasing because of the effects of the automatic stabilizers, A. all of the following B. the economy is contracting C. the annual deficit will approach zero D. the budget is cyclically balanced E. the economy is growing 99. When automatic stabilizers are the cause of higher deficits, we would expect to observe that A. the economy has been contracting B. the economy has been growing C. interest rates must be rising D. interest rates must be falling E. net exports have been decreasing 100. As a result of an increased deficit associated with discretionary fiscal policy, A. both the interest rate and real output fall B. both the interest rate and nominal output rise C. the interest rate falls and real output rises D. the interest rate rises and real output falls E. nominal output rises, real output falls, and the interest rate rises 101. Discretionary policy deficits are associated with A. higher interest rates, higher prices, and lower output B. higher interest rates, higher prices, and higher output C. higher interest rates, lower prices, and lower output D. higher interest rates, lower prices, and higher output E. lower interest rates, lower prices, and lower output 102. A deficit resulting from the use of discretionary fiscal policy A. increases interest rates B. decreases interest rates C. increases interest rates if the effect of the decrease in the demand for money is greater than the effect of the increase in the supply of government securities D. increases interest rates if the effect of the decrease in the demand for money is less than the effect of the increase in the supply of government securities E. increases interest rates if the effect of the increase in the demand for money is greater than the effect of the decrease in the supply of government securities 103. Deficits that arise from discretionary fiscal policy lead to A. increased private demand for money, which is offset by the sale of more government securities B. decreased private demand for money, which is offset by the sale of more government securities and higher interest rates C. increases in the number of government securities sold to the public and higher interest rates D. decreases in the number of government securities sold to the public and higher interest rates E. increases in the public's demand for money and increases in the number of government securities sold to the public, leading to lower interest rates 104. Discretionary expansionary fiscal policy may lead to A. all of the following except d B. decreased unemployment C. inflation D. lower interest rates E. crowding out 105. Bigger government budget deficits may be expected to increase interest rates because A. all of the following B. prices increase C. output increases D. the demand for money increases as income increases E. the government is selling more securities 106. Crowding out occurs because lower interest rates discourage saving and make it harder to borrow. A. True B. False 107. Which component of aggregate expenditure is most subject to crowding out? A. consumption expenditures B. investment spending C. U.S. imports D. government purchases of goods and services E. saving 108. Crowding out refers to the government's increased demand for credit, which A. displaces some private sector consumption by decreasing the price level B. displaces some private sector borrowing by decreasing the interest rate C. displaces some private sector borrowing by increasing the interest rate D. hires labor away from the private sector E. means longer lines at government agencies 109. Crowding out occurs by A. causing reduced government purchases of goods and services B. reducing the value of the multiplier used for government purchases of goods and services by increasing the interest rate C. reducing the value of the multiplier used for government purchases of goods and services by increasing the marginal propensity to consume D. reducing the value of the multiplier used for government purchases of goods and services by decreasing the marginal propensity to consume E. increasing the value of the multiplier used for government purchases of goods and services by increasing the marginal propensity to consume 110. If a federal budget deficit causes crowding out, A. real GDP does not increase by as much as the government purchases of goods and services multiplier would predict because bondholders' saving declines B. real GDP does not increase by as much as the government purchases of goods and services multiplier would predict because investment declines C. interest rates fall, reducing the burden of the debt D. interest rates fall, bringing the current deficit back down E. interest rates fall, so that decreases in investment and government purchases of goods and services exactly offset the expansionary effect of the deficit 111. Which of the following is not a form of crowding out? A. lower household spending due to higher interest rates B. lower business spending due to higher interest rates C. lower net exports due to higher interest rates D. lower private spending due to higher taxes E. none of the above; they all represent crowding out 112. If government deficits stimulate the economy, A. there is no crowding out B. crowding in may occur C. crowding out is more than offset by crowding in D. crowding out and crowding in cancel each other out E. interest rates must fall 113. Crowding in is more likely to occur, as a consequence of federal deficits, when A. the economy is overheated B. interest rates increase significantly C. a contractionary gap exists D. the deficits lower expectations about economic growth E. an expansionary gap exists 114. The crowding out of private investment is associated with A. a reduction in profitable investment opportunities due to a recession B. increased competition from foreign investors in U.S. markets C. higher interest rates resulting from a declining rate of saving D. higher interest rates resulting from increased borrowing by the federal government E. higher interest rates resulting from restrictive monetary policy 115. The crowding in of private investment is associated with A. increased investment opportunities resulting from a withdrawal of foreign investors B. increased investment opportunities resulting from a decline in interest rates C. a reduction in the level of government spending D. a reduction in corporate income taxes E. more favorable business expectations resulting from an increase in aggregate demand induced by increased government borrowing 116. If U.S. interest rates are higher than world rates, we would expect the U.S. dollar to appreciate. A. True B. False 117. When there are large federal budget deficits, the trade deficit (i.e., exports minus imports) tends to shrink. A. True B. False 118. What were the chief links between the U.S. federal budget deficit and the U.S. trade deficit during the 1980s? A. High U.S. interest rates led to a rise in the relative value of the dollar. B. High U.S. interest rates led to a decrease in the relative value of the dollar. C. U.S. interest rates fell relative to foreign rates and thus the dollar appreciated. D. The U.S. price level declined relative to that of foreign countries, causing U.S. interest rates to fall. E. The recessions of 1980 and 1981-1982 were the key links; recession widened the budget deficit and this caused the U.S. price level to fall, enabling foreigners to invest in U.S. assets. 119. All of the following are possible implications of federal budget deficits except one. Which is the exception? A. crowding out B. increased interest rates C. inflation D. increased trade deficits E. depreciation of the dollar 120. Increasing U.S. trade deficits result in A. both c and d B. all of the following C. reduced purchases of U.S. government bonds by people in other countries D. accumulation of dollars overseas E. increased U.S. investment abroad 121. The key link between the so-called twin deficits involves A. higher interest rates and a stronger dollar B. lower interest rates and a stronger dollar C. higher interest rates and a weaker dollar D. lower interest rates and therefore larger trade deficits E. higher interest rates leading to more exports 122. Increased government borrowing to cover a budget deficit causes A. a higher interest rate and depreciation of the U.S. dollar B. a higher interest rate and appreciation of the U.S. dollar C. a lower interest rate and depreciation of the U.S. dollar D. a lower interest rate and appreciation of the U.S. dollar E. no change in the interest rate and depreciation of the U.S. dollar 123. If action by the President and Congress reduces the federal government budget deficit, then interest rates will __________, the U.S. dollar will __________, and the foreign trade deficit will __________. A. increase; appreciate; increase B. increase; depreciate; increase C. decrease; appreciate; decrease D. decrease; depreciate; increase E. decrease; depreciate; decrease 124. If the federal government budget deficit increases, then interest rates will __________, the U.S. dollar will __________, and the foreign trade deficit will __________. A. increase; depreciate; decrease B. increase; appreciate; increase C. increase; depreciate; increase D. decrease; appreciate; increase E. decrease; depreciate; decrease 125. The US government can continue to run a deficit as long as lenders are willing to lend money to the government. A. True B. False 126. Which of the following steps does not belong in a sequence reflecting the impact on international markets of increased borrowing to finance a large government budget deficit? A. The U.S. Treasury sells securities. B. The sale of securities drives up interest rates. C. Attracted by the high interest rates, foreigners purchase dollars in order to invest in the U.S. D. Greater demand for the dollar increases its value in exchange for other currencies. E. The rising value of the dollar leads to increased U.S. exports and reduced imports. 127. The Budget Enforcement Act of 1990 A. was a package of spending cuts and tax increases designed to reduce the deficit B. was a deficit reduction plan proposed by President Clinton C. succeeded in balancing the budget within two years D. identified defense and international programs as the only two areas of potential spending cuts E. gave the President the authority to make unilateral spending cuts to balance the budget 128. The U.S. Social Security program A. is a redistribution program that collects taxes from current workers to provide pensions for current retirees B. is a redistribution program that collects taxes from retired individuals with high incomes and uses them to provide pensions for individuals with low incomes C. is a pay-as-you-go program in which workers' contributions are invested to provide them with income at retirement D. is funded by earnings on its investment portfolio E. is funded through money creation by the Federal Reserve 129. The Social Security program A. is funded by a tax on wealth B. is experiencing a Trust Fund deficit that beginning in 2001 C. consists of a pension program and a program that provides hospital care for the elderly D. was designed to allow workers to retire at age 55 E. is running a Trust Fund deficit that is funded by borrowing from the U.S. Treasury 130. During the first 50 years of the Social Security program, A. the Trust Fund has always run annual surpluses B. the Trust Fund has always run annual deficits C. administrators were always concerned with the "baby boom" problem D. whenever tax revenue exceeded program costs, Congress raised benefits, expanded eligibility, or spent the surplus on something else E. political support for the program dwindled 131. Social Security reforms adopted in 1983 included A. privatization of part of the program B. a cap on the Medicare tax rate C. expanding coverage to include government employees D. a reduction in benefits for retired workers with high incomes E. a higher tax rate, an expanded tax base, and an increase in the retirement age from 65 to 67 132. Between the years 2042 and 2052, A. the Social Security Trust Fund will be so large that payroll taxes can be eliminated B. the Social Security Trust Fund will be empty C. Social Security will have an operating surplus of about $1 trillion per year D. the baby boom generation will be gone and Social Security's problems will be eliminated E. the Social Security Trust Fund will be larger than the national debt 133. Suggested Social Security reforms include A. lowering payroll taxes B. privatizing part of the system C. raising taxes in order to provide improved benefits D. eliminating the Trust Fund E. borrowing from the Treasury to finance a payroll tax cut 134. In 2010, Social Security payouts exceeded payins for the first time in history. A. True B. False 135. The national debt is dramatically larger than the federal government budget deficit. A. True B. False 136. As of 2012 the U.S. national debt was A. about $1 million B. about $1 billion C. $1 trillion D. $3 trillion E. about $15 trillion 137. The difference between the federal budget deficit and the national debt is that the A. deficit is a stock and the debt is a flow B. deficit is a flow and the debt is a stock C. debt includes interest payments and the deficit does not D. deficit can be positive but the debt cannot E. debt can be negative but the deficit cannot 138. The national debt is A. a flow variable showing the amount by which the government's spending is greater than its revenues in a given year B. a stock variable showing the amount by which the government's spending is greater than its revenues in a given year C. a stock variable measuring the net accumulation of past deficits D. a flow variable measuring the net accumulation of past deficits E. none of the above 139. National debt held by the public includes public debt held by all of the following, except one. Which is the exception? A. banks B. firms C. the U.S. Treasury D. households E. foreign entities 140. U.S. debt has never exceeded 100 percent of GDP because if it did so, the federal government would be bankrupt. A. True B. False 141. More than 40 percent of the publicly held U.S. federal debt is held by foreign individuals and corporations. A. True B. False 142. If a budget deficit is the result of expenditures for programs such as farm subsidies and Social Security, the burden on future generations is slight. A. True B. False 143. If the fraction of U.S. government securities held by foreigners increases, A. current consumption by U.S. citizens must fall B. current consumption by U.S. citizens can rise C. current consumption increases by U.S. citizens will be offset by equivalent decreases in future consumption when the debt is refinanced D. current consumption decreases by U.S. citizens will be offset by equivalent increases in future consumption when the debt is refinanced E. the debt will be less of a burden on our children 144. Increases in the fraction of national debt held by foreigners __________ the burden of debt service on future generations __________. A. decrease; because it is easier for the borrowing nation to default on the debt B. decrease; but may make the country more vulnerable to foreign intervention C. decrease; because debt servicing accomplished by increases in the money supply is not as inflationary as it would be if all debt were held domestically D. increase; because taxes to pay the debt are collected within the country but more interest payments on the debt are sent outside E. increase; because foreign bondholding pushes up interest rates at date of issue, increasing crowding out 145. The long-run opportunity cost of government spending's crowding out of private investment A. equals about 10 percent of GDP B. is lower interest rates and hence lower interest income for U.S. resource owners C. results from the corresponding expansionary gap D. results from the corresponding contractionary gap E. would be greater if the government's expenditures were devoted to increasing retirement benefits rather than to educating the work force 146. When crowding out occurs, A. private spending replaces public spending B. the dollar typically weakens in foreign exchange markets C. public spending replaces private spending D. it offsets any gains created from the lower interest rates E. none of the above 147. Among the following cases, the opportunity cost of crowding out is the smallest when the government spends $9 billion A. staffing the Internal Revenue Service hotline B. printing stationery for new members of Congress C. placing photographs of the new President in government and diplomatic offices worldwide D. on Social Security benefits E. on new interstate highways 148. The opportunity cost of deficit spending is likely to be low A. only when it creates new physical capital B. only when it creates new human capital C. only when it improves existing physical capital D. only when it improves existing human capital E. when it creates or improves physical or human capital 149. A possible budget reform is A. a quadrennial budget B. breaking down the budget into increasingly small budget lines C. appointing agency heads with different priorities than those of elected representatives D. creating a capital budget E. eliminating the operating budget 150. A possible budget reform is A. a quadrennial budget B. breaking down the budget into increasingly small budget lines C. appointing agency heads with different priorities than those of elected representatives D. a biennial budget E. eliminating the operating budget 151. A federal capital budget would include spending on buildings, highways, computers, and military equipment. A. True B. False 152. Large budget __________ have come from a combination of tax __________ and spending __________. A. surpluses, cuts, increases B. surpluses, increases, increases C. deficits, increases, increases D. deficits, cuts, cuts E. deficits, cuts, increases 153. One explanation for persistent federal budget deficits is that officials are not required to A. honor the Constitution B. balance the budget C. raise taxes D. run for reelection E. None of the answers is correct 154. Which of the following is not true about the U.S. twin deficits? A. The U.S. is now the world’s leading creditor B. The U.S. borrows huge sums from abroad C. Some critics blame U.S. fiscal policy for the switch from a creditor to a debtor nation D. Japan and China are big buyers of U.S. Treasury securities E. A debtor country becomes more beholden to those countries that supply credit 155. The federal budget experienced surpluses from A. 1998-2001 B. 2002-2006 C. 1970-1973 D. 1991-1994 E. 1985-1988 156. A fuller picture of government’s role in the economy includes state and local governments. A. True B. False 157. The debt ceiling is a limit on the total amount of money the federal government can legally borrow. A. True B. False 158. If the US government defaults on its debt payment it could have a big impact on the world eonomy. Which of the following would not be a likely impact? A. cost of borrowing for US would increase B. market interest rates in the US would increase C. mortgage interest rates would increase D. unemployment would increase E. the federal deficit would decline 159. The share of __________ in total federal outlays will likely __________ as interest rates __________ from historic lows of recent years. A. interest, decline, rise B. interest, climb, drop C. interest, climb, rise D. Medicare, climb, drop E. defense, decline, rise 160. A major foreign holder of U.S. Treasury securities is A. Japan B. China C. United Kingdom D. oil exporting nations E. All of the answers are correct 161. The U.S. spent 3 percent of GDP building and maintaining the public infrastructure between 1950 and 1970. Since 1980, that share has A. decreased slightly to 2 percent B. decreased all the way to zero C. stayed constant at 3 percent D. increased slightly to 4 percent E. increased significantly to 8 percent Test Bank for Macroeconomics: A Contemporary Introduction William A. McEachern 9781133188131, 9780538453776