Chapter 14 - Public Debt

Name:

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

When a country has a deficit, its debt is growing.

A pay as you go social security system raises the capital stock.

If government budget is in deficit, then real government saving is in surplus.

If the government runs a deficit, households will feel wealthier.

A budget deficit caused by changing labor income taxes changes the labor and production.

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

The governments sources of funds include:

a.	taxes.
b.	printing money.
c.	borrowing.
d.	all of the above.

The governments sources of funds include:

a.	taxes.
b.	government purchases.
c.	paying interest on past bonds.
d.	all of the above.

The governments sources of funds include:

a.	transfer payments.
b.	printing money.
c.	paying interest on the government debt.
d.	all of the above.

The governments sources of funds include:

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

10.

The governments uses of funds include:

a.	government purchases.
b.	transfer payments.
c.	paying interest on the past government debt.
d.	all of the above.

11.

The governments uses of funds include:

a.	government purchases.
b.	borrowing.
c.	printing money.
d.	all of the above.

12.

The governments uses of funds include:

a.	printing money.
b.	transfer payments.
c.	taxes.
d.	all of the above.

13.

The governments uses of funds include:

a.	borrowing.
b.	printing money.
c.	paying interest on the past government debt.
d.	all of the above.

14.

A balanced government budget is one where:

a.	government purchases equal taxes.
b.	government debt is zero.
c.	the governments real savings is zero.
d.	all of the above.

15.

Total bond holding of all households is B^g_t because:

a.	the quantity of all private bonds held by the public is zero.
b.	the quantity of all government bonds held by the public is zero.
c.	the public views government bonds as less risky than private bonds.
d.	the public views private bonds as less risky than government bonds.

16.

If money and the price level are constant, then the government’s real budget deficit is:

a.	.
b.	.
c.	.
d.	none of the above.

17.

If money and the price level are constant, then the government’s real budget debt is:

a.	.
b.	.
c.	.
d.	none of the above.

18.

If the government reduces taxes by $1 this year without raising taxes or printing more money, then

a.	future tax liabilities will rise by $1 plus the interest, R, that must be paid on the borrowing.
b.	future tax liabilities will rise by $1 less the interest, R, that must be paid on the borrowing.
c.	future tax liabilities will fall by $1 plus the interest, R, that must be paid on the borrowing.
d.	future tax liabilities will fall by $1 less the interest, R, that must be paid on the borrowing.

19.

Ricardian equivalence implies that a government budget deficit:

a.	increases current consumption.
b.	increases future tax liabilities.
c.	reduces national saving.
d.	all of the above.

20.

Ricardian equivalence holds:

a.	only for year to year changes in the governments budget.
b.	no matter how long until the bonds are to be paid off.
c.	only with a government deficit not a surplus.
d.	only with a government surplus not a deficit.

21.

A strategic budget deficit is designed to:

a.	increase GDP.
b.	increase economic activity.
c.	constrain the behavior of future governments.
d.	all of the above.

22.

The standard view of the budget deficit is that it:

a.	reduces the GDP in the long run.
b.	reduces investment.
c.	reduces the capital stock in the long run.
d.	all of the above.

23.

The standard view of the budget deficit is that it:

a.	reduces the GDP in the long run.
b.	increases investment.
c.	increases the capital stock in the long run.
d.	all of the above.

24.

The standard view of the budget deficit is that it:

a.	increases the GDP in the long run.
b.	reduces investment.
c.	increases the capital stock in the long run.
d.	all of the above.

25.

The standard view of the budget deficit is that it:

a.	increases the GDP in the long run.
b.	increases investment.
c.	reduces the capital stock in the long run.
d.	all of the above.

26.

The standard view of the budget deficit is that a deficit:

a.	does not affect the economy in the long run.
b.	and the public debt are a burden on the economy.
c.	does not affect the economy in the short run.
d.	encourages economic growth.

27.

Households may feel wealthier due to a tax cut, if:

a.	they are very concerned about future generations.
b.	they expect the bonds created by the deficit to be paid off after their lifetime.
c.	they are using an infinite planning horizon.
d.	they plan to leave a bequest to their heirs.

28.

Households may feel wealthier due to a tax cut, if:

a.	they are not able to borrow as much against future earnings as they wish.
b.	they are not able to lend present earnings as much as they wish.
c.	they care a lot about future generations.
d.	they plan to leave a bequest to their heirs.

29.

If households ignore effects on future generations, a pay as you go social security system:

a.	reduces current national savings.
b.	reduces investment.
c.	reduces the future capital stock.
d.	all of the above.

30.

If households ignore effects on future generations, a pay as you go social security system:

a.	reduces current national savings.
b.	raises investment.
c.	raises the future capital stock.
d.	all of the above.

31.

If households ignore effects on future generations, a pay as you go social security system:

a.	raises current national savings.
b.	reduces investment.
c.	raises the future capital stock.
d.	all of the above.

32.

If households ignore effects on future generations, a pay as you go social security system:

a.	raises current national savings.
b.	raises investment.
c.	reduces the future capital stock.
d.	all of the above.

33.

If households ignore effects on future generations when a pay as you go social security system starts, the then elderly:

a.	have a positive income effect on their consumption.
b.	receive benefits that in present value is less the present value of their contributions.
c.	receive low returns on any taxes paid into the system.
d.	all of the above.

34.

If households ignore effects on future generations, when a pay as you go social security system starts, the then elderly:

a.	have a negative income effect on their consumption.
b.	receive benefits that in present value is greater than the present value of their contributions to the system.
c.	receive low returns on any taxes paid into the system.
d.	all of the above.

35.

If households ignore effects on future generations, a pay as you go social security system:

a.	increases consumption.
b.	reduces the capital stock in the long run.
c.	reduces national saving.
d.	all of the above.

36.

If households ignore effects on future generations, a pay as you go social security system:

a.	increases consumption.
b.	increases the capital stock in the long run.
c.	increases national saving.
d.	all of the above.

37.

If households ignore effects on future generations, a pay as you go social security system:

a.	decreases consumption.
b.	reduces the capital stock in the long run.
c.	raises national saving.
d.	all of the above.

38.

If households ignore effects on future generations, a pay as you go social security system:

a.	decreases consumption.
b.	increases the capital stock in the long run.
c.	reduces national saving.
d.	all of the above.

39.

If households ignore effects on future generations, a pay as you go social security system:

a.	reduces investment.
b.	reduces GDP in the long run.
c.	reduces private saving.
d.	all of the above.

40.

If households ignore effects on future generations, a pay as you go social security system:

a.	reduces investment.
b.	increases GDP in the long run.
c.	increases private saving.
d.	all of the above.

41.

If households ignore effects on future generations, a pay as you go social security system:

a.	raises investment.
b.	reduces GDP in the long run.
c.	raises private saving.
d.	all of the above.

42.

If households ignore effects on future generations, a pay as you go social security system:

a.	raises investment.
b.	increases GDP in the long run.
c.	reduces private saving.
d.	all of the above.

43.

A pay as you go social security system only increase consumption and reduces investment, if:

a.	households leave bequests.
b.	if households neglect the adverse affects on their descendants.
c.	if the planning horizon is overlapping generations.
d.	households increase their savings.

44.

If currently alive households take full account of the negative affects of a pay as you go social security system on their descendants, then the:

a.	effects are magnified.
b.	effects are nil.
c.	effects are exponential.
d.	effects are unchanged.

45.

Open market operations amount to:

a.	printing more money and raising taxes and lowering taxes and raising the public debt.
b.	printing less money and reducing taxes and raising taxes and reducing the public debt.
c.	printing more money and raising taxes and lowering taxes and raising the public debt.
d.	printing more money and reducing taxes and raising taxes and reducing the public debt.

46.

By varying its budget deficit, a government can:

a.	change the timing of taxes.
b.	avoid having to raise taxes to pay for a deficit.
c.	avoid accumulation of government debt.
d.	all of the above.

47.

If the time path of government purchases does not change and the government cuts lump sum taxes, then:

a.	real GDP does not change.
b.	real consumption does not change.
c.	real gross investment does not change.
d.	all of the above.

48.

If the time path of government purchases does not change and the government cuts lump sum taxes, then:

a.	real GDP does not change.
b.	real consumption increases.
c.	real gross investment falls.
d.	all of the above.

49.

If the time path of government purchases does not change and the government cuts lump sum taxes, then:

a.	real GDP does rise.
b.	real consumption does not change.
c.	real gross investment rises.
d.	all of the above.

50.

If the time path of government purchases does not change and the government cuts lump sum taxes, then:

a.	real GDP falls.
b.	real consumption falls.
c.	real gross investment does not change.
d.	all of the above.

51.

If the time path of government purchases does not change and the government cuts lump sum taxes, then:

a.	the interest rate does not change.
b.	the real wage rate does not change.
c.	the future capital stock does not change.
d.	all of the above.

52.

If the time path of government purchases does not change and the government cuts lump sum taxes, then:

a.	the interest rate rises.
b.	the real wage rate falls.
c.	the future capital stock does not change.
d.	all of the above.

53.

If the time path of government purchases does not change and the government cuts lump sum taxes, then:

a.	the interest rate does not change.
b.	the real wage rate rises.
c.	the future capital stock falls.
d.	all of the above.

54.

If the time path of government purchases does not change and the government cuts current labor income taxes, then:

a.	labor supply is shifted to the future.
b.	labor supply is shifted to the present.
c.	present GDP is reduced.
d.	future GDP is increased.

55.

If the time path of government purchases does not change and the government cuts current assets income taxes, then:

a.	households save more and consume less in the present.
b.	households save and consume less in the present.
c.	households save less and consume more in the present.
d.	households save and consume more in the present.

Short Answer

56.

What is the government budget constraint when government borrowing is allowed?

57.

What are public, private and national saving and what is the implication of real national saving?

58.

What are the effects of the government lowering taxes by $1 for one period in the market clearing model with no transfer payments, the money stock fixed, no inflation and with a given time path of government purchases?

59.

What is the Ricardian equivalence theorem?

60.

Why might a budget deficit make households feel wealthier after a tax cut?