Solution: Chaper 30 Government Budgets

Ch30 Government Budgets

Multiple Choice Questions

1. If South Dakota's governor reports a budget surplus in 2011, that state government likely:

A. received more in taxes than it spent in that year.

B. increased the proportional tax level.

C. equalized spending and taxes in that year.

D. increased the corporate income tax rate.

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

2. If the state of Washington's government collects $75 billion in tax revenues in 2013 and total spending in the same year is $74.8 billion, the result will be a:

A. budget deficit.

B. budget surplus.

C. decrease in payroll tax.

D. decrease in proportional taxes.

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

3. If the government for the state of Washington collects $65.8 billion in tax revenues in 2013 and total spending in the same year is $74.8 billion, the result will be:

A. an increase in payroll tax.

B. an increase in excise tax.

C. a budget surplus.

D. a budget deficit.

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

4. A ______________________ is created each time the federal government spends more than it collects in taxes in a given year.

A. budget deficit

B. budget surplus

C. corporate tax

D. regressive tax

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

5. A ______________________ means that government spending and taxes are equal.

A. fiscal budget

B. balanced budget

C. contractionary fiscal policy

D. discretionary fiscal policy

Answer: B  Reference:

Explanation:

Type: Multiple Choice                    

6. A __________________________ policy will cause a greater share of income to be collected from those with high incomes than from those with lower incomes.

A. proportional tax

B. regressive tax

C. progressive tax

D. excise tax

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

7. A ________________________________ is calculated as a flat percentage of income earned, regardless of level of income.

A. progressive tax

B. regressive tax

C. proportional tax

D. estate and gift tax

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

8. When the share of individual income tax collected by the government from people with higher incomes is smaller than the share of tax collected from people with lower incomes, then the tax is ____________________.

A. optional

B. proportional

C. progressive

D. regressive

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

9. In 2010, Microsoft will pay corporate income tax to the federal government based on the company's __________________.

A. proportional tax rate

B. corporate profits

C. optional tax rate

D. excise profits

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

10. What do goods like gasoline, tobacco, and alcohol typically share in common?

A. A progressive tax is imposed on each of them.

B. A regressive tax is imposed on each of them.

C. They are all subject to government excise taxes.

D. They are all subject to government fiscal taxes.

Answer: C  Reference:

Explanation:

Type: Multiple Choice   

                

11. The federal government levies _____________________________ on people who pass assets ____________________________, either after death or during life.

A. an estate and gift tax; to the next generation

B. a regressive tax; to non-family members

C. an excise tax; to their children

D. a progressive tax; to non-family members

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

12. If government tax policy requires Peter to pay $15,000 in tax on annual income of $200,000 and Paul to pay $10,000 in tax on annual income of $100,000, then the tax policy is: 

A. optional.

B. progressive.

C. proportional.

D. regressive.

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

13. If government tax policy requires Jane to pay $25,000 in taxes on annual income of $200,000 and Mary to pay $10,000 in tax on annual income of $100,000, then the tax policy is: 

A. regressive.

B. progressive.

C. proportional.

D. optional.

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

14. If government tax policy requires Bill to pay $20,000 in taxes on annual income of $200,000 and Paul to pay $10,000 in tax on annual income of $100,000, then the tax policy is: 

A. regressive.

B. progressive.

C. proportional.

D. optional.

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

15. By June, 2010, the U.S. government owed $13.6 trillion dollars ________________ that, over time, has remained unpaid.

A. from decreases in excise tax

B. from decreases in income tax

C. in accumulated government debt

D. from decreases in corporate tax

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

16. The government can use _____________ in the form of ____________________ to increase the level of aggregate demand in the economy.

A. an expansionary fiscal policy; an increase in government spending

B. a contractionary fiscal policy; a reduction in taxes

C. a contractionary fiscal policy; an increase in taxes

D. an expansionary fiscal policy; an increase in corporate taxes

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

17. If a government reduces taxes in order to increase the level of aggregate demand, what type of fiscal policy is being used?

A. discretionary

B. contractionary

C. standardized

D. expansionary

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

18. A typical ____________________________ fiscal policy allows government to decrease the level of aggregate demand, through increases in taxes.

A. expansionary

B. contractionary

C. discretionary

D. standardized

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

19. Which of the following terms is used to describe the set of policies that relate to government spending, taxation, and borrowing?

A. financial policies

B. monetary policies

C. fiscal policies

D. economic policies

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

20. A government collects $70 billion quarterly in tax revenue. Each year it allocates $15 billion to the justice system and $29 billion for the administrative costs. What percentage of its total annual tax revenue is left for allocation to the remaining categories of government spending?

A. 84.29%

B. 15.71%

C. 62.85%

D. 37.15%

Answer: A  Reference:

Explanation: **This question has a higher degree of difficulty because students must calculate total annual revenue based on tax revenue collected quarterly prior to calculating the remaining percentage.

Type: Multiple Choice                   

21. A government annually allocates $5 billion of its total tax revenue to weather related disaster relief, $21 billion to healthcare and $11 billion to education. If the government's quarterly tax revenue is $33 billion, what percentage of its budget is allocated annually to healthcare?

A. 17.50%

B. 63.63%

C. 25.00%

D. 15.90%

Answer: D  Reference:

Explanation: **This question has a higher degree of difficulty because students must calculate total annual revenue based on tax revenue collected quarterly prior to calculating the percentage annually allocated to healthcare.

Type: Multiple Choice                   

22. A government collects $700 billion annually in tax revenue. Each year it allocates $70 billion to the justice system and $130 billion for its own administrative costs. What percentage of annual tax revenue is allocated to these two categories of government spending?

A. 37.15%

B. 28.57%

C. 17.51%

D. 27.58%

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

23. A government annually collects $230 billion in tax revenue and allocates $70 billion to military spending. What percentage of this government's budget is spent on its military?

A. 27.50%

B. 36.63%

C. 30.43%

D. 41.90%

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

24. A government annually collects $320 billion in tax revenue and allocates $42 billion to education spending. What percentage of this government's budget is spent on education?

A. 24.50%

B. 12.31%

C. 30.13%

D. 13.12%

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

25. A government annually collects $230 billion in tax revenue and allocates $29 billion to its universal healthcare spending. What percentage of this government's budget is spent on healthcare?

A. 12.60%

B. 26.63%

C. 16.43%

D. 21.90%

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

26. A government collects $600 billion annually in tax revenue. Each year it allocates $35 billion to healthcare and $50 billion for education. What percentage of annual tax revenue is allocated to these two categories of government spending?

A. 21.37%

B. 14.16%

C. 17.51%

D. 26.41%

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

27. A government collects $700 billion annually in tax revenue. Each year it allocates $130 billion to interest payments that it must pay on its accumulated debt. What percentage of annual tax revenue is allocated to make these interest payments?

A. 17.15%

B. 28.75%

C. 18.57%

D. 27.58%

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

28. When the government passes a new law that explicitly changes overall tax or spending levels, it is enacting:

A. discretionary fiscal policy.

B. progressive fiscal policy.

C. regressive fiscal policy.

D. fiscal policy.

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

29. _____________________ are a form of tax and spending rules that can affect aggregate demand in the economy without any additional change in legislation.

A. Standardized employment budgets

B. Discretionary fiscal policies

C. Automatic stabilizers

D. Budget expenditures

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

30. In 2009, the U.S. government spent $1.4 trillion more than it collected in taxes. This deficit was about:

A. 22% of the size of the U.S. GDP in 2009.

B. 26% of the size of the U.S. GDP in 2009.

C. 18 % of the size of the U.S. GDP in 2009.

D. 10% of the size of the U.S. GDP in 2009.

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

31. Which of the following is the percentage of annual US government spending allocated to foreign aid?

A. 21%

B. 10%

C. 1%

D. 17%

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

32. At the beginning of 2009, a government had a total debt of $540 billion dollars. It ended 2009 with a $6 billion dollar budget surplus. In 2010, its budget surplus reached $8 billion dollars.  What is the total debt of the government equal to at the end of 2010?

A. $554 billion

B. $540 billion

C. $0

D. $14 billion

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

33. At the beginning 2010, the government of Norway had no debt and held $180 billion dollars in its sovereign fund. To stimulate its economy during 2011, Norway's government plans to spend $35 billion more than it will collect in tax revenue and in 2012, its spending will exceed tax revenues by $25 billion.  What will the total government debt equal at the end of 2012?

A. $60 billion

B. $0

C. $120 billion

D. $180 billion

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

34. If a country’s GDP increases, but its debt also increases during that year, then the country’s debt to GDP ratio for the year will _______________ in proportion to the magnitude of the changes.

A. decrease because GDP increased

B. increase because its debt increased

C. increase

D. increase or decrease

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

35. If a country’s GDP increases, but its debt decreases during that year, then the country’s debt to GDP ratio for the year will _______________ in proportion to the magnitude of the changes.

A. increase or decrease

B. decrease because its debt decreased

C. increase because GDP increased

D. decrease

Answer: A  Reference:

Explanation:

Type: Multiple Choice                    

36. If a country’s GDP decreases, but its debt increases during that year, then the country’s debt to GDP ratio for the year will _______________ in proportion to the magnitude of the changes.

A. decrease

B. increase or decrease

C. increase

D. decrease because GDP decreased

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

37. During a recession, if a government uses an expansionary fiscal policy to increase GDP, the:

A. aggregate supply curve will shift to the right. 

B. aggregate supply curve will shift to the left.

C. aggregate demand curve will shift to the left.

D. aggregate demand curve will shift to the right.

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

38. When inflation begins to climb to unacceptable levels in the economy, the government should:

A. use contractionary fiscal policy to shift aggregate demand to the right.

B. use contractionary fiscal policy to shift aggregate demand to the left.

C. use expansionary fiscal policy to shift aggregate demand to the right.

D. use expansionary fiscal policy to shift aggregate demand to the left.

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

39. When increasing oil prices cause aggregate supply to shift to the left, then:

A. unemployment and inflation decrease.

B. unemployment decreases and inflation increases.

C. unemployment and inflation increase.

D. unemployment increases and inflation decreases.

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

40. If an economy moves into a recession, causing that country to produce less than potential GDP, then:

A. automatic stabilizers will cause tax revenue to decrease and government spending to increase.

B. automatic stabilizers will cause tax revenue to increase and government spending to decrease.

C. tax revenue and government spending will be higher because of automatic stabilizers.

D. tax revenue and government spending will be lower because of automatic stabilizers.

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

41. If Canada's economy moves into an expansion while its economy is producing more than potential GDP, then:

A. government spending and tax revenue will increase because of automatic stabilizers.

B. government spending and tax revenue will decrease because of automatic stabilizers.

C. automatic stabilizers will increase government spending and decrease tax revenue.

D. automatic stabilizers will decrease government spending and increase tax revenue.

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

42. If individual income tax accounts for more total revenue than the payroll tax in the U.S., why would over half the households in the country pay more in payroll taxes than in income taxes?

A. income tax is a proportional tax

B. income tax is a progressive tax

C. payroll tax is a regressive tax

D. payroll tax is a progressive tax

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

43. If the economy is producing less than its potential GDP, _____________________ will show a larger deficit than the actual budget.

A. discretionary fiscal policy

B. the automatic stabilizers

C. the standardized employment budget

D. expansionary fiscal policy

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

44. When a country's economy is producing at a level that exceeds its potential GDP, the standardized employment budget will show a __________________ than the actual budget.

A. smaller surplus

B. smaller deficit

C. larger deficit

D. surplus

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

45. Assume that laws have been passed that require the federal government to run a balanced budget. During a recession, the government will want to implement _____________________, but may be unable to do so because such a policy would ____________________________.

A. contractionary fiscal policy; lead to a budget deficit

B. discretionary fiscal policy; lead to a budget surplus

C. contractionary fiscal policy; lead to a budget surplus

D. expansionary fiscal policy; lead to a budget deficit

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

46. The time lag for monetary policy is typically ________________ the time lag for fiscal policy.

A. longer than

B. shorter than

C. about the same as

D. the same as

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

47. Currently, the US government accumulated debt to GDP ratio: 

A. is lower than its historical high point.

B. is higher than it has ever been.

C. is lower than it has ever been.

D. has remained relatively steady for the past decade.

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

48. The current level of US government accumulated debt, when measured in nominal dollars:

A. has reached higher levels in the past.

B. is higher than it has ever been.

C. is lower than it has ever been.

D. has remained steady for the past decade.

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

49. A consensus estimate based on a number of studies suggests that if there is an increase in budget deficits (or a fall in budget surplus) by 1% of GDP, it will most likely cause which of the following?

A. an increase of 0.5–1.0% in the long-term interest rate

B. long and variable time lags in enacting the fiscal policy

C. smaller impact due to temporary fiscal policy

D. output above the potential GDP output level

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

Solutions: Ch31 Impacts - Government Borrowing

Ch31 Impacts - Government Borrowing

Multiple Choice Questions

1. When governments are borrowers in financial capital markets, which of the following is least likely to be a possible source of the funds from a macroeconomic point of view?

A. central bank prints more money

B. increase in household savings

C. decrease in borrowing by private firms

D. foreign financial investors

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

2. A country's economic data indicates that there has been a substantial reduction in the financial capital available to private sector firms. Which of the following most likely had the greatest influence on this economy?

A. especially large and sustained household saving

B. increased borrowing by private firms

C. reduction in influx of funds for foreign financial investors

D. especially large and sustained government borrowing

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

3. If a country's economic data shows private savings of $300 million, government spending of $350 million, tax revenue of $400 million, and a trade surplus of $75 million, then what does investment equal?

A. $775 million

B. $475 million

C. $275 million

D. $700 million

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

4. If a country's economic data shows private savings of $500 million, government spending of $300 million, tax revenue of $400 million, and a trade surplus of $100 million, then what does investment equal?

A. $600 million

B. $500 million

C. $700 million

D. $900 million

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

5. If a country's economic data shows private savings of $400 million, government spending of $250 million, tax revenue of $400 million, and a trade surplus of $175 million, then what does investment equal?

A. $550 million

B. $425 million

C. $800 million

D. $375 million

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

6. If a country's economic data shows that private savings equal $250 million, government spending equals $400 million, taxes equal $350, and the trade surplus equals $150 million, then what does investment equal?

A. $50 million

B. $75 million

C. $450 million

D. $350 million

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

7. If a country's economic data shows that private savings equal $300 million, government spending equals $400 million, taxes equal $300, and the trade surplus equals $100 million, then what does investment equal?

A. $150 million

B. $175 million

C. $200 million

D. $100 million

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

8. If a country's economic data shows that private savings equal $350 million, government spending equals $375 million, taxes equal $300, and the trade surplus equals $125 million, then what does investment equal?

A. $50 million

B. $150 million

C. $425 million

D. $600 million

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

9. In the national savings and investment identity framework, an inflow of savings from abroad is, by definition, equal to:

A. private sector investment.

B. the trade surplus.

C. the trade deficit.

D. domestic household savings.

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

10. From a macroeconomic point of view, which of the following is a source of demand for financial capital?

A. savings by households and firms

B. foreign financial investment

C. domestic household private savings

D. government borrowing

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

11. The U.S. economy has two main sources for financial capital; _______________________ and ____________________________.

A. private savings from U.S. households and firms; inflows of foreign financial investment.

B. private sector investment; government borrowing

C. private savings from U.S. households and firms; government borrowing

D. private sector investment; inflows of foreign financial investment from abroad

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

12. If the quantity of financial capital supplied is equal to the quantity of financial capital demanded then, the national savings and investment identity is written as:

A. (M - X) - S = (G + T) - I

B. S + (M - X) = I + (G - T)

C. S + (G - T) = I - (X - M)

D. S = (X - M) - (G - T)

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

13. When a government records a budget surplus, the national savings and investment identity is written as:

A. S = I + (G - T) + (X - M)

B. S + (M - X) + (T - G) = I

C. S - (G - T) = I - (X - M)

D. S + (T - G) = 1 + (X - M)

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

14. When a government records a trade surplus, the national savings and investment identity is written as:

A. S = (G - T) + (X - M) - I

B. S - (G - T) = I - (X - M)

C. S = I + (G - T) + (X - M)

D. S + (G - T) = I - (X - M)

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

15. A __________________ often results in an outflow of financial capital leaving the domestic economy and being invested in the global economy?

A. trade surplus

B. trade deficit

C. fiscal deficit

D. twin surplus

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

16. A prolonged period of budget deficits may lead to ___________________.

A. outflows of financial capital abroad

B. lower inflation

C. lower economic growth

D. increasing exchange rates

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

17. A ___________________________________ can lead to disruptive economic patterns and heavy strains on a country’s banking and financial system.

A. prolonged period of trade surpluses

B. sustained pattern of large trade deficits

C. prolonged period of budget surpluses

D. sustained pattern of large budget deficits

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

18. Which of the following is least likely to be the result of economic disruptive patterns caused by a prolonged period of government budget deficits?

A. high inflation

B. substantial inflows of foreign financial capital

C. increasing exchange rates

D. strains on a country's financial system

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

19. An increase in government borrowing can:

A. allow private investment to expand.

B. crowd out private investment in physical capital.

C. increase the incentive to invest in technology.

D. cause a substantial decrease in interest rates.

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

20. A reduction in government borrowing can:

A. decrease the incentive to invest.

B. increase the interest rate.

C. crowd out private investment in human capital.

D. give private investment an opportunity to expand.

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

21. When the interest rate in an economy increases, it is likely the result of either:

A. a decrease in the government's budget surplus or an increase in its budget deficit.

B. a decrease in the government budget surplus or its budget deficit.

C. an increase in the government budget surplus or a decrease in its budget deficit.

D. an increase in the government budget surplus or its budget deficit.

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

22. When the interest rate in an economy decreases, it is most likely as a result of:

A. an increase in the government budget surplus or its budget deficit.

B. a decrease in the government budget surplus or its budget deficit.

C. an increase in the government budget surplus or a decrease in its budget deficit.

D. a decrease in the government budget surplus or an increase in its budget deficit.

Answer: C  Reference:

Explanation:

Type: Multiple Choice                    

23. An increase in the government’s budget surplus will cause the interest rate to:

A. either increase or decrease.

B. remain the same.

C. increase.

D. decrease.

Answer: D  Reference:

Explanation:

Type: Multiple Choice                    

24. A decrease in the government’s budget surplus will cause the interest rate to:

A. decrease.

B. increase.

C. either increase or decrease.

D. remain the same.

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

25. If the government initiates an expansionary monetary policy at the same time that its budget deficit decreases, then the interest rate will ______________________.

A. increase

B. either increase or decrease

C. decrease

D. remain unchanged

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

26. If the government initiates an expansionary monetary policy at the same time that its budget deficit increases, then the interest rate will __________________.

A. remain unchanged

B. either increase or decrease

C. increase

D. decrease

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

27. A ____________________________ is one economic mechanism by which government borrowing can crowd out private investment.

A. deficit decrease

B. smaller trade surplus

C. larger trade surplus

D. higher interest rate

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

28. If a government's budget deficits are increasing aggregate demand when the economy is already producing near potential GDP, causing a threat of an inflationary increase in price levels, then the central bank may react with:

A. a contractionary monetary policy.

B. an expansionary monetary policy.

C. a discretionary monetary policy.

D. a loose monetary policy.

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

29. If the U.S. economy is producing at a level that is substantially less than potential GDP and the government's budget deficits are increasing aggregate demand, then ____________________________ is not much of a danger.

A. a tight monetary policy

B. an inflationary increase in the price level

C. international financial investment

D. the central bank's contractionary monetary policy

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

30. If the U.S. government's budget deficits are increasing aggregate demand, and the economy is producing at a level that is substantially less than potential GDP, then:

A. higher interest rates will crowd out private investment.

B. government borrowing is likely to crowd out private investment.

C. an inflationary increase in the price level is a real danger.

D. the central bank might react with an expansionary monetary policy.

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

31. If the government’s budget deficit increases while the economy is producing substantially less then potential GDP and expansionary monetary policy is implemented, then any ________________ from government borrowing would be _____________________________ from that monetary policy.

A. higher interest rates; largely offset by the lower interest rates

B. lower interest rates; largely offset by the higher interest rates

C. increase in interest rates; reduced by private sector investment

D. inflationary increase in price level; crowding out private investment

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

32. If a government decides to finance an investment in ________________ with higher taxes or ____________________ in other areas, it need not worry that it is crowding out private investment.

A. roads and bridges; increased borrowing

B. water supply and sewers; by raising capital spending

C. public physical capital; lower government spending

D. hydroelectric dams and windmills; government R&D

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

33. In most developed countries, the government plays a large role in society’s investment in human capital through _________________________.

A. direct spending

B. the education system

C. tax incentives

D. private sector R&D

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

34. In a market-oriented economy, private firms will undertake most of the _____________________________, and ________________ should seek to avoid a long series of large budget deficits that might crowd out such investment.

A. economic growth activities; monetary policy

B. economic growth activities; fiscal policy

C. investment in human capital; monetary policy

D. investment in physical capital; fiscal policy

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

35. When a business firm makes an investment in physical capital, what is that investment subject to?

A. state and local government incentives

B. economic output and productivity

C. political orientated incentives

D. the discipline of the market

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

36. Because of the difference between the discipline imposed by market competition and the discipline imposed by political decisions, which of the following is most likely?

A. reduced government borrowing to avoid crowding out private investment

B. difficulty managing public investment so it’s done in a cost effective way

C. government budgets will exactly shadow the rate of private investment

D. tax budgets increase without a corresponding drop in private investment

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

37. An additional investment in human capital, especially for the low-income nations of the world, will likely directly increase which of the following?

A. productivity and economic growth

B. increased levels of R&D spending

C. consumer orientated spin-offs

D. highly qualified teachers

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

38. A government will likely ____________________________ to encourage investment in technology R&D by private firms?

A. reduce R&D grants to nonprofit organizations

B. reduce R&D grants to universities

C. spend more on R&D in government laboratories

D. implement fiscal policy establishing tax incentives

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

39. Which of the following is least likely to benefit the civilian economy?

A. R&D carried out in government laboratories

B. R&D aimed at producing new weapons

C. direct private sector R&D spending

D. tax policy promoting civilian R&D spending

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

40. If David Ricardo's theory holds completely true, then any change in budget deficits or budget surpluses would be completely offset by which of the following?

A. a change in currency exchange rates

B. a sustained pattern of trade imbalances

C. a corresponding change in private saving

D. a dependence on inflows of capital

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

41. Ricardian equivalence means that:

A. changes in private savings offset any changes in the government deficit.

B. changes in exports offset any changes in the government deficit.

C. changes in imports offset any changes in the government deficit.

D. changes in investment offset any changes in the government deficit.

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

42. Suppose you are analyzing data for an economy in which Ricardian neutrality holds true. If the budget deficit increases by 50, then:

A. investment will increase by 50

B. investment will decrease by 50

C. private savings will decrease by 50

D. private savings will increase by 50

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

43. Suppose you are analyzing data for an economy in which Ricardian neutrality holds true.  If the budget surplus increases by 100, then:

A. private savings will increase by 100.

B. private savings will decrease by 100.

C. investment will increase by 100.

D. investment will decrease by 100.

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

44. A government deficit has increased from 30 to 50. The country's trade deficit is 100 and private savings equal 65 and investment equal 90. If Ricardian neutrality holds true, after this change in the government's budget, private savings will equal:

A. 40.

B. 105.

C. 95.

D. 85.

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

45. A government deficit has decreased from 100 to 60. The country's trade deficit is 120 and private savings equal 80 and investment equals 100. If Ricardian neutrality holds true, after this change in the government's budget, private savings will equal:

A. 120.

B. 70.

C. 40.

D. 140.

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

46. If an economy has a budget surplus of 400, private savings of 1,200, and investment of 1,600, what will the balance of trade in this economy equal?

A. 0

B. deficit of 1,600

C. deficit of 1,200

D. deficit of 400

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

47. If an economy has a budget surplus of 1,500, private savings of 3,000, and investment of 5,000, what will the balance of trade in this economy equal?

A. deficit of 500

B. surplus of 500

C. surplus of 1,500

D. deficit of 1,500

Answer: B  Reference:

Explanation:

Type: Multiple Choice                    

48. If an economy has a budget deficit of 600, private savings of 2,000, and investment of 800.  What is the balance of trade in this economy?

A. deficit of 600

B. deficit of 2000

C. surplus of 2000

D. surplus of 600

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

49. When government policy moves from a budget deficit to a budget surplus and the trade deficit remains constant:

A. savings will increase if investment remains constant.

B. investment will increase if savings remain constant.

C. savings will decrease, no matter what happens to investment.

D. investment will decrease if savings remain constant.

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

50. When government policy moves from a budget surplus to a budget deficit and the trade deficit remains constant:

A. savings will decrease no matter what happens to investment.

B. savings will decrease if investment remains constant.

C. investment will increase if savings also remains constant.

D. investment will decrease if savings also remains constant.

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

51. A government bu with a budget deficit and a trade deficit. During the year, the government changed its policy and is now running a budget surplus. If all other factors hold constant, this change in policy will cause:

A. the exchange rate to decrease and the trade deficit to increase.

B. the exchange rate to increase and the trade deficit to decrease.

C. the exchange rate and the trade deficit to decrease.

D. the exchange rate and the trade deficit to increase.

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

52. A government began 2013 with a budget surplus and a trade deficit. Due to the onset of recession, the government changed its policy and is now running a budget deficit. If all other factors hold constant, this change in policy will cause:

A. the exchange rate and the trade deficit to increase.

B. the exchange rate and the trade deficit to decrease.

C. the exchange rate to decrease and the trade deficit to increase.

D. the exchange rate to increase and the trade deficit to decrease.

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

53. Which of the following is not a consequence of an increase in the government's budget deficit?

A. private savings increases while holding everything else constant

B. exports increase while imports and all other variables are held constant

C. imports increase while exports and all other variables are held constant

D. investment falls while holding everything else constant

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

54. If a government experiences an increase in its budget surplus, which of the following possible outcomes will likely result?

A. investment falls while everything else holds constant

B. exports decrease while imports and all other variables are held constant

C. imports increase while exports and all other variables are held constant

D. private savings decrease while everything else holds constant

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

55. A moderate increase in a budget deficit that leads to a _____________________ is not necessarily a cause for concern.

A. combination of less foreign capital and banks that are bankrupt

B. moderate increase in a trade deficit and a moderate appreciation of the exchange rate

C. a series of large budget deficits

D. shift in aggregate demand so far to the right that it causes high inflation

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

56. In the U.S. economy, the offsetting effects of private saving compared to government borrowing are typically noted as being represented by which of the following ratios?

A. much less than one-to-one

B. slightly less than one-to-one

C. slightly more than two-to-one

D. much more than two-to-one

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

57. _______________________________ can set the stage for international financial investors first to send their funds to a country and cause an appreciation of its exchange rate and then to pull their funds out and cause a depreciation of the exchange rate and a financial crisis as well.

A. Trade balance

B. Twin deficits

C. Trade deficits

D. Crowding out

Answer: A  Reference:

Explanation:

Type: Multiple Choice