Economics 252 – Review Questions Chapter 12 – Deficits, Surpluses, and Debt
Consider the data in and complete Table 1 in answering Questions (1) and (2). Assume debt is zero at the beginning of year 1, and all surpluses or deficits are used to reduce or increase national debt.
Table 1 – Budget and Debt Status
Government Surplus or National
Expenditures Tax Receipts Deficit Debt
Year 1 120 110 ______ ______
Year 2 130 110 ______ ______
Year 3 140 140 ______ ______
Year 4 150 160 ______ ______
(1) In Table 1, what is the budget deficit or surplus in year 2?
(a) Surplus of 10.
(b) Surplus of 20.
(c) Deficit of 10.
(d) Deficit of 20.
(2) In Table 1, what is the National Debt at the end of Year 4?
(a) 20
(b) 30
(c) 10
(d) 0.
Consider the information for the
Table 2
Fiscal Year Budget Balance Cyclical Component Structural Component
1985 -212 -14 -198
1986 -221 -8 -213
1987 -150 -8 -142
1988 -155 +8 -163
1989 -152 +24 -176
1990 -221 +16 -237
1991 -269 -44 -225
1992 -290 -58 -282
1993 -255 -43 -212
1994 -203 -13 -190
1995 -164 +2 -166
1996 -107 +2 -109
1997 -22 +34 -56
1998 +70 +68 +2
(3) In Table 2, the cyclical deficits between 1991 and 1994 indicate:
(a) Unemployment increases and inflation decreases. (economic recession).
(b) Unemployment decreases and inflation increases (economic expansion).
(c) Stable unemployment and inflation rates.
(d) None of the above.
(4) In Table 2, the long term reduction in the structural component indicates:
(a) a trend towards fiscal stimulus.
(b) a trend towards fiscal restraint.
(c) that unemployment is increasing and inflation is decreasing.
(d) that unemployment is decreasing and inflation is rising..
(5) Fiscal policy used to achieve fiscal stimulus will involve either:
(a) greater government expenditure or lower taxes.
(b) greater government expenditure or higher taxes.
(c) lower government expenditure or lower taxes.
(d) lower government expenditure or lower taxes.
(6) Much of each year's federal budget is considered "uncontrollable" because:
(a) it must be spent for purchases, as opposed to transfer payments.
(b) to a large extent, current revenues and expenditures are the result of decisions made in prior years.
(c) a large share of expenditures are related to entitlement programs such as medicare and social security.
(d) both (b) and (c) above.
(7) An automatic stabilizer is designed to:
(a) stabilize prices in the economy.
(b) stabilize unemployment rates in the economy.
(c) respond automatically and countercyclically to changes in national income.
(d) increase government revenues during recessions.
(8) Which of the following is an automatic stabilizer that causes increased expenditures when the economy enters a recession?
(a) unemployment compensation payments.
(b) social security payments to the disabled.
(c) corporate income taxes.
(d) indexed retirement and social security benefits.
(9) Which of the following is an automatic stabilizer that causes increased government revenues when the economy enters an economic expansion?
(a) social security payments to the disabled.
(b) corporate income taxes.
(c) unemployment compensation payments.
(d) medicaid.
(10) Crowding out occurs when the government:
(a) increases taxes, causing a decrease in consumption.
(b) borrows, making it more difficult for the private sector to borrow.
(c) uses a budget surplus to retire the national debt.
(d) places a high tax on cigarettes which "crowds out" people from bars which smokers frequent.
(11) External financing of the debt:
(a) allows us to get more private-sector goods without giving up public-sector goods in the short run.
(b) allows us to get more public-sector goods without giving up private-sector goods in the short run.
(c) shifts the production possibilities curve to the right.
(d) poses no real cost, even when the debt is repaid.
(12) When the U.S. Treasury issues new bonds to replace bonds that have matured, it is engaging in:
(a) debt refinancing.
(b) debt servicing.
(c) income transfers.
(d) discretionary fiscal spending.
(13) Debt service:
(a) is a discretionary payment of the federal budget.
(b) refers to the annual interest payments on the debt.
(c) represents the true burden of the debt.
(d) is a payment made to the federal government.
(14) A deficit ceiling directly limits:
(a) the rate at which government spending can exceed government revenue.
(b) the amount of the national debt.
(c) the trade deficit.
(d) inflation.