Chapter 23



Chapter 13

Practice Quiz

Federal Deficits, Surpluses and the National Debt

1. During the late 1998-2001, federal government budget deficits

a. were completely removed.

b. dropped significantly from a high of $300 billion.

c. remained fairly stable at about $150 billion per year.

d. exceeded $200 billion in each year.

ANS:

a. See Exhibit 2 in the text.

2. The federal government finances a budget deficit by

a. taxing businesses and households.

b. selling Treasury securities.

c. printing more money.

d. reducing its purchases of goods and services.

ANS:

b. The U.S. Treasury borrows by selling Treasury bill (T-bills), notes, and bonds promising to make specified interest and repay the loan on a given date.

3. In 2009, the national debt was approximately

a. $60 billion.

b. $600 billion.

c. $12 trillion.

d. $20 trillion.

ANS:

c. See Exhibit 5 in the text.

4. The national debt to GDP ratio in 2009

a. was about seven times its size in 1982.

b. was twice as large in 2000.

c. was approximately the same size in 1945.

d. was approximately the same size in 1951.

ANS:

d. See Exhibit 5 in the text.

5. Which of the following countries has the smallest national debt as a percentage of GDP in 2009?

a. Italy

b. Canada

c. Australia

d. Japan

e. France

ANS:

c. See Exhibit 6 in the text.

6. Which of the following is false?

a. The national debt’s size decreased steadily after World War II until 1990 and then increased sharply each year.

b. The national debt increases in size whenever the federal government has a budget surplus.

c. The national debt is currently about the same size as it was during World War II.

d. All of the above are false.

ANS:

d. All answers are incorrect.

7. In 2009, approximately what percentage of the U.S. national debt was owed to foreigners?

a. About 2.5 percent.

b. About 30 percent.

c. About 20 percent.

d. About 60 percent.

ANS:

b. See Exhibit 8 in the text.

8. Which of the following own a portion of the national debt?

a. Federal, state, and local governments

b. Private U.S. citizens

c. Banks

d. Foreigners

e. All of the above

ANS:

e. Treasury bills are widely held throughout the public and private sectors both domestically and overseas.

9. The portion of the U.S. national debt held by foreigners

a. represents a burden because it transfers purchasing power from U.S. taxpayers to other countries.

b. is an accounting entry that represents no real burden.

c. decreased as a proportion of the total debt during the 2000’s.

d. has been constant for many decades.

ANS:

a. This means interest payments to foreigners are paid by U.S. taxpayers.

10. Which of the following statements about crowding out is true?

a. It is caused by a budget surplus.

b. It is not caused by a budget deficit.

c. It cannot completely offset the multiplier effect of deficit government spending.

d. It affects interest rates and, in turn, consumption and investment spending.

ANS:

d. The crowding-out effect is a reduction in private spending caused by federal deficits financed by U.S. Treasury borrowing.

11. Which of the following statements about crowding out is true?

a. It can completely offset the multiplier.

b. It is caused by a budget deficit.

c. It is not caused by a budget surplus.

d. All of the above are true.

ANS:

d. If crowding out occurs, reduced private spending offsets the multiplier effect of increased government spending. The debt is a summation of each years deficits and therefore effects consumption and investments. No crowding out occurs with budget surpluses because the government is not competing with consumers and investors for available funds.

12. “Crowding in” refers to federal government deficits

a. used for public infrastructure, which will offset any decline in business investment.

b. which reduce private business and consumption spending.

c. which reduce future rates of economic growth.

d. all of the above.

ANS:

a. Federal budget deficits financed by U.S. Treasury borrowing creates wealth that increases business investment spending in addition to government spending for infrastructure.

13. When measured as a percentage of GDP, the U.S. national debt reached its highest levels as a result of

a. World War II.

b. the Vietnam War.

c. the Reagan defense buildup and tax cuts.

d. the Bush economic recovery program.

ANS:

a. As shown in Exhibit 4 in the text, the national debt reached about 120 percent of GDP at the end of World War II.

14. The national debt is unlikely to cause national bankruptcy because the

a. national debt can be refinanced by issuing new bonds.

b. interest on the public debt equals GDP.

c. national debt cannot be shifted to future generations for repayment.

d. federal government cannot repudiate the outstanding national debt.

ANS:

a. The federal government can “roll over” its debt by replacing old bonds with new bonds.

15. Supply-side economists argue that less government spending

a. will contract the productive side of the economy.

b. will result in more crowing out.

c. causes higher rates of unemployment and inflation.

d. would cause interest rates to increase dramatically.

e. would make more investment capital available at lower rates of interest to the private sector.

ANS:

e. The crowding-out effect argues that federal government borrowing increase interest rates, resulting in lower consumption by households and low investment spending by businesses.

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