Chapter 12 - Government Expenditure

Name:

True/False
Indicate whether the statement is true or false.

Government can use its funds to purchase goods or transfer money to people.

If a household’s transfer payment less taxes is greater than zero, then government is a net source of funds for that household.

A permanent increase in government purchases causes an increase in the real rate of interest.

A permanent increase in government purchases increases GDP.

A temporary increase in government expenditures will reduce gross investment.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

The biggest category of government purchases in the US is:

a.	state and local purchases.
b.	defense purchases.
c.	federal government purchases.
d.	federal transfer payments.

Government transfer payment as a percentage of GDP have been:

a.	generally rising.
b.	generally falling.
c.	cyclical.
d.	constant.

The fastest growing part of the federal government budget since WWII is:

a.	interest payments on the debt.
b.	defense spending.
c.	transfer payments.
d.	infrastructure.

State and local governments purchases include:

a.	defense spending.
b.	education spending.
c.	social security retirement spending.
d.	all of the above.

10.

The biggest category of state and local expenditures are:

a.	education.
b.	transfer payments.
c.	defense.
d.	none of the above.

11.

State and local governments purchases are about half:

a.	interest on debt.
b.	transfer payments.
c.	defense.
d.	none of the above.

12.

The government budget constraint without borrowing is:

a.
b.
c.
d.

13.

The government budget constraint is:

a.	government purchases less transfer payments equal revenue from money growth less taxes.
b.	government purchases plus transfer payments equal taxes plus revenue from money growth.
c.	government purchases plus taxes equal transfer payment plus revenue from money creation.
d.	government purchases times transfer payment equals taxes times revenue from money creation.

14.

The government’s budget constraint is:

a.
b.
c.	, if revenue from money creation is zero.
d.	all of the above.

15.

The government’s budget is:

a.	government purchases plus transfer payments equal taxes plus revenue from money creation.
b.	government purchases plus transfers less taxes equal revenue from money creation.
c.	the negative of government equals transfers less taxes, if revenue from money creation is zero.
d.	all of the above.

16.

If there is no revenue from money growth, then the government’s budget constraint without borrowing is:

a.	.
b.	.
c.
d.	all of the above.

17.

If the money supply does not change, then the government’s budget constraint without borrowing is:

a.
b.
c.
d.	all of the above.

18.

Among the government’s sources of funds are;

a.	transfer payments.
b.	tax revenue.
c.	government purchases.
d.	all of the above.

19.

Among the government’s sources of funds are;

a.	transfer payments.
b.	government purchases.
c.	real revenue from printing money.
d.	all of the above.

20.

Among the government’s uses of funds are;

a.	transfer payments.
b.	tax revenue.
c.	real revenue from printing money.
d.	all of the above.

21.

Among the government’s uses of funds are;

a.	government purchases.
b.	tax revenue.
c.	real revenue from printing money.
d.	all of the above.

22.

In the market clearing model without government borrowing, the net effect of government on households is an increase in funds of:

a.	transfer payments times taxes.
b.	transfer payments plus taxes.
c.	taxes less transfer payments.
d.	transfer payments less taxes.

23.

If a household’s transfer payments less taxes is positive, then the government:

a.	is a net source of funds for that household.
b.	is a net use of fund of funds for that household.
c.	is a net drain on that household.
d.	does not affect that household’s budget constraint.

24.

If a household’s transfer payments less taxes is negative, then the government:

a.	is a net source of funds for that household.
b.	is a net use of fund of funds for that household.
c.	is a net subsidizer of that household.
d.	does not affect that household’s budget constraint.

25.

According to the market clearing model a permanent increase in government purchases causes:

a.	a decrease in consumption.
b.	an increases in the real interest rate.
c.	an increases in real GDP.
d.	all of the above.

26.

According to the market clearing model a permanent increase in government purchases leads to:

a.	an increase in capital utilization.
b.	a decrease in the supply of capita services.
c.	an increase in the demand for capital services.
d.	no change in the real rate of interest.

27.

According to the market clearing model a permanent increase in government purchases causes an increase in:

a.	real GDP.
b.	the real interest rate.
c.	the real wage rate.
d.	none of the above.

28.

In the market clearing model the intertemporal substitution effect from a permanent increase in government purchases:

a.	works through real interest rate changes.
b.	works through real wage changes.
c.	works through real interest rate and real wage changes.
d.	does not exist because the real interest rate and real wage rated do not change.

29.

In the market clearing model a permanent decrease in government purchase will:

a.	increase consumption.
b.	increase the real interest rate.
c.	increase the real wage rate.
d.	all of the above.

30.

In the market clearing model a permanent increase in government purchases does not increase the real wage because:

a.	labor supply and labor demand increase about the same amount.
b.	labor supply is fixed.
c.	labor demand is downward sloping.
d.	neither labor demand nor labor supply shift due to the permanent increase in government purchases.

31.

In the market clearing model a permanent increase in government purchases does not increase the real interest rate because:

a.	the supply of capital services and demand for capital services increase about the same amount.
b.	neither demand for capital services nor supply of capital services shift due to the permanent increase in government purchases.
c.	the demand for capital services is downward sloping.
d.	the supply of capital services is upward sloping.

32.

According to the market clearing model, a one unit permanent increase in government purchases causes:

a.	GDP to rise about one unit.
b.	consumption to fall about one unit.
c.	gross investment to fall about one unit.
d.	all of the above.

33.

According to the market clearing model a one unit permanent increase in government purchases causes:

a.	no change in GDP.
b.	consumption to fall about one unit.
c.	no change in gross investment.
d.	all of the above.

34.

US data since the end of the Korean war shows that permanent changes in government purchases are:

a.	acyclical as the model predicts.
b.	procyclical as the model predicts.
c.	acyclical as opposed to the model that predicts they will be procyclical.
d.	countercyclical as opposed to the model that predicts they will be acyclical.

35.

Since the end of the Korean war, US permanent government spending has:

a.	increased as GDP has increased.
b.	decreased as GDP has increased.
c.	had little relationship to fluctuations in real GDP.
d.	decreased when GDP decreased.

36.

The model predicts that a temporary increase in government purchases causes:

a.	an increase in consumption.
b.	a reduction in real GDP.
c.	a reduction in gross investment.
d.	all of the above.

37.

The model predicts that a temporary increase in government expenditures will lead to:

a.	a decrease in consumption.
b.	an increase in investment.
c.	a decrease in GDP.
d.	none of the above.

38.

People might work more during a war time temporary increase in government purchases because of:

a.	patriotism.
b.	the increase in the MPL as the model predicts.
c.	increased investment the model predicts.
d.	all of the above.

39.

People might work more during a war time temporary increase in government purchases because of:

a.	a military draft or voluntary enlistment takes away some primary household earners and to maintain consumption as the model predicts, those households may have other members work who did not previously.
b.	the increase in the MPL leading to an increase in the demand for labor and increased capital utilization as the model predicts.
c.	increased investment leading to hire capital stocks that increase the demand for labor as the model predicts.
d.	all of the above.

40.

The real wage increase in the data during war time might be overstated as:

a.	price controls lead to understating the price level.
b.	labor demand is so high in war time.
c.	because capital utilization falls in war time.
d.	all of the above.

41.

With a temporary change in government purchases the model predicts investment is:

a.	acyclical.
b.	procyclical.
c.	countercylical.
d.	exogenous.

42.

With a permanent change in government purchases the model predicts consumption is:

a.	acyclical.
b.	procyclical.
c.	countercylical.
d.	exogenous.

43.

The model predicts that a temporary decrease in government purchases causes:

a.	an increase in consumption.
b.	a reduction in real GDP.
c.	an increase in gross investment.
d.	all of the above.

44.

According to the market clearing model, a one unit temporary decrease in government purchases causes:

a.	no change in GDP.
b.	investment to rise about one unit.
c.	no change in the interest rate.
d.	all of the above.

45.

According to the market clearing model, a one unit temporary decrease in government purchases causes:

a.	a one unit decrease in GDP.
b.	gross investment to rise about one unit.
c.	consumption to rise about one unit.
d.	all of the above.

46.

The model predicts that a temporary decrease in government expenditures will lead to:

a.	an increase in real wages.
b.	a decrease in the real interest rate.
c.	a decrease in GDP.
d.	none of the above.

47.

The model predicts that a temporary decrease in government purchases causes:

a.	an increase in consumption.
b.	a reduction in real GDP.
c.	an increase in gross investment.
d.	all of the above.

48.

The model predicts a permanent decrease in government purchases causes:

a.	an increase consumption.
b.	an increases the real interest rate.
c.	an increases real GDP.
d.	all of the above.

49.

The model predicts a permanent decrease in government purchases leads to:

a.	an increase in capital utilization.
b.	a decrease in the supply of capita services.
c.	an increase in the demand for capital services.
d.	no change in the real rate of interest.

50.

According to the model a permanent decrease in government purchases does not increase the real wage according to the market clearing model because:

a.	labor supply and labor demand decrease about the same amount.
b.	labor supply is fixed.
c.	labor demand is downward sloping.
d.	neither labor demand nor labor supply shift due to the permanent increase in government purchases.

51.

According to the model a permanent decrease in government purchases does not decrease the real interest rate according to the market clearing model because:

a.	the supply of capital services and demand for capital services decrease about the same amount.
b.	neither demand for capital services nor supply of capital services shift due to the permanent increase in government purchases.
c.	the demand for capital services is downward sloping.
d.	the supply of capital services is upward sloping.

52.

A temporary decrease in government purchases does not increase the real wage according to the market clearing model because:

a.	labor supply and labor demand decrease about the same amount.
b.	labor supply is fixed.
c.	labor demand is downward sloping.
d.	neither labor demand nor labor supply shift due to the permanent increase in government purchases.

53.

A temporary decrease in government purchases does not decrease the real interest rate according to the market clearing model because:

a.	the supply of capital services and demand for capital services decrease about the same amount.
b.	neither demand for capital services nor supply of capital services shift due to the permanent increase in government purchases.
c.	the demand for capital services is downward sloping.
d.	the supply of capital services is upward sloping.

54.

A temporary increase in government purchases does not increase the real wage according to the market clearing model because:

a.	labor supply and labor demand increase about the same amount.
b.	labor supply is fixed.
c.	labor demand is downward sloping.
d.	neither labor demand nor labor supply shift due to the permanent increase in government purchases.

55.

A temporary increase in government purchases does not increase the real interest rate according to the market clearing model because:

a.	the supply of capital services and demand for capital services increase about the same amount.
b.	neither demand for capital services nor supply of capital services shift due to the permanent increase in government purchases.
c.	the demand for capital services is downward sloping.
d.	the supply of capital services is upward sloping.

Short Answer

56.

What is the government’s budget constraint without government borrowing and what does it show us?

57.

How does government without borrowing affect the household’s budget constraint?

58.

What are the effects of a permanent increase in government purchases in the market clearing model?

59.

What are the effects of a temporary increase in government purchases?

60.

What has been the US experience in war time temporary increase in government purchases and how do they conform with the predictions of the model?