1. The U.S. public debt: a) refers to the'debts of all units of goveminent--Federal, state, and loca!. b) consists ofthe.totaldebt ofU.S. households, businesses, and government. c) refers to the col1ective amount that U.S. cit,iZensand businesses owe to foreigners. d) consistsofthe historical accurnulation of all Federal government deficits and surpluses. Answc

2. The Federal budget deficit is found by: a) subtracting government tax revenues plus government borrowing from government spending in a particular year. b) subtracting government tax revenues from govemment spending in a particu1ar year. . c) cumulating the differences betweengove~ent spehding and tax revenues over all years since the nation's foundíng. d) subtracting governmentrevenues from the,noninvestment-type govemment spending in a particular year. Answer:

3. The amountby which government expenditures exceed revenues during a particular year: a) isthe national debt. b) is the budget deficit. c) refers to functional finance. d) refers to countercyclical fisca! policy. Answer:

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Use the following to answer questions 4-6: Answer the next question( s) using the following budget infonnation for a hypotheticaleconomy. AU data are in billions of dollars. Government spendin Year 1 Year 2 Year 3 Year 4 Year 5

$450 500 600 640 680

Tax revenues

GDP

$425 450 500 620 580

$2000 3000 4000 5000 4800

4. Refer to the above data. lfyear 1 is the fIrst year ofthis nation's existence and year 5 is the present year, this nation's public debt lS:

a) $295 billion. Answer:

c) $3540 billion.

d) $230 billion.

5. Refer to the above data. The budget defIcit in year 3 is: a) $175 billion. b) $3050 billion. c) $100 billion.

d)$295 billion.

Answer:

b) $100 billion.

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6. Refer to the above data. Ifyear 1 is the fIrst year ofthis nation's existence and year 4 is the present year, the public debt as a percentage of GDP in year 4 is:. a) 7.5 percent. b) 1.39 percent. c) 2.5 percent. d) 3.9 percent. Answer:

11. Tfgovernment adhered strictly to' an anÍ1uallybalanced budget, the govemment's budget would: a)' vary in a counterc){clicalfashion. c) have no impact on domestic output and employment. b) tend to destabilize the economy. d) tend to stabilize the economy. Answer:

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12. The idea of a cyc1icallybalanced budget is for govemment to: a) balance theeconomy, not wonying about e~pansion ofthe public debt. b) halance the budget over ten-year periods. c) exactly match budget deficits,accruing jn the recession phase ofthe business cyc1ewith surpluses occurring in the late recovery phase.

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d) make sure the structUral deficit is alwayszero. Answer:

14. Functional fmance: a) is designed to increase the J\,1PCto achieve greater macroeconomic stability.

b) is conduciveto annuallybalanced budgets.

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c) views the public budget primanly as a means of stabilizing the economy.' d) is supported mainly by monetarists. Answer:

15. The philosophyoffunctional[mance contendsthat: a) b) c) d)

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the Federal budget should be balanced, not annually, but rather over the duration ofthe business cycle. the Federal budget should be used primarily to a1terthe allocation of resources and not to stabilize the economy. automatic stabilizers are so effective that discretionary fiscal policy is unnecessary. the prirnary function ofthe Federal budget is to stabilize the economy and balancing the budget as such is offar lesser

importance. . Answer:

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16. The idea that the basic purpose ofthe Federal budget is to stabilize the economy regardless ofresulting increases in the size ot the public debt best describes: a) a social1yoptimal budget. b) functional fmance. c) a cyclically balanced budget. d) an annually balanced budget. Answer:

41. The "crowding-out etlect" suggests that: a) tax increases are paid primarily out of sayingand therefore are not an effective fiscal device. b) increases in govemment spending financed through borrowing will increase the real interest rate and reduce private investment. . c) it is very di:fficultto have excessive aggregate spending in a capitalist economy. d) consumer and investment spending always vary inverse1y. Answer:

42. The "crowding-out effect" suggests that: a) government spending is increasing at the expense of private investment. b) irnports are replacing domestic production. , c) private investment is increasing at the expense of govemment spending. d) investment is increasing at the expense ot consumption. Answer:

52. Otherthingsequal, a Federal budget deficit:. a) b) c) d)

increases governments tota! assets and reduces its totalliabilities. may or maynot incre~se the public debt. increases thepublic dept and the total interest payments paid by government. is likely to be lower during recession than prosperity.

l'rnswer:

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51. Other things being equa1,which of the policies wil1have the most contractionary effect on the economy?

a) a ba1ancedbudget .

c) a budget deficitfmancedby creatingnew money

b) a buclgetsurplus held as an idle money balance Answer:

d) a budget surplus used for debt retirement .

. 52. "Bui1t-instability" means that: a) an annually balanced budget will automatically offset the procyc1ical tendenci es created by state and local finance and ther~b~

stabilizesthe economy. b)

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with given tax rates and expenditures policies a tise in domestic income wi11reduce a budget deficit ar produce a budget

surplus while a declinewi11result in a deficitor a lowerbudget surplus.

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c)

Congress will automatically change the tax structure and expenditure programs to correct upswings and downswings in

business activity. d)

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government expenditures and tax receipts automatical1ybalance over the business cyc1e,though they may be out of balanc~ in

anysingleyear.

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Answer:

53. If Congress adjusted our tax system so that the :MPCwas reduced, the a) economy would become more infl~tion prone. c) stability ofthe economy would be unaffected. b) economy would become less stable. d) economy would become more stable. Answer: .

54. A major advantage ofthebuilt-in Orautomatic stabilizers is that they: a) simultaneously stabilize'the economy and reducethe absolute size ofthe public debL b) automatically produce surpluses during recessions and deficits during inflations. c) require no legislative action by Congress to be made effective. d) guarantee that the Federal budget wil1be balanced over the course ofthebusiness cyc1e. Answer: