Chapter 13: Quiz Answers -- Budget Deficits and the National Debt


  1. Which of the following statements about budget deficits and the national debt is correct?
    The national debt is the total amount of indebtedness of the federal government at any point in time while the budget deficit is the amount by which federal government outlays exceed its revenues in a given year. A useful analogy is to think of water filling up a swimming pool. The rate that the water is filling up the tub is analogous to the budget deficit; the level of water in the pool at any point in time is the national debt.

  2. The approximate size of the national debt currently is more than
    $8.4 trillion. This amount was accurate at year-end 2005. Visit the Bureau of the Public Debt to obtain daily debt figures.

  3. The U.S. budget deficit may be overstated (i.e. seem too large) for all the following reasons except
    The size of the deficit depends on the rate of population growth. The deficit probably does not depend heavily on the population growth rate because government revenues would increase along with government outlays as population increased. Each of the other answers are true statements.

  4. Recovery from recessions tends to make budget deficits decrease because
    tax revenues rise. The other choices state that government spending for welfare programs increases and the nation's unemployment rate rises. In fact, government spending for welfare programs decreases with an economic recovery, which brings lower unemployment rates.

  5. The portion of the deficit that is not attributable to the business cycle is called
    the structural deficit. The cyclical deficit is the portion of the deficit caused by the business cycle.

  6. Crowding out of private investment occurs when
    the government competes for funds with the private sector, driving up interest rates. Savers can choose to purchase private debt or government debt. More government debt, other things equal, leads to higher interest rates.

  7. Of the choices listed below, the biggest holder of the U.S. national debt is
    the federal government. The federal government owns about 25 percent of its own debt, and the Federal Reserve owns another significant chunk. Much of the interagency debt is due to the current Social Security trust fund surplus, which is used to purchase U.S. debt.

  8. Which of the following are possible costs of running large deficits?
    all of the above. Crowding out of private investment, a larger trade deficit, and income distribution are all potential costs that must be considered when deciding to increase significantly the budget deficit.

  9. If current trends continue, the federal government will default on its debt in the next ten years.
    False. In fact, the U.S. government ran surpluses from 1998 through 2001, though those trends have reversed sharply since then.

  10. Ultimately, the ability of any government to service its debt depends on the strength of its economy.
    True. A strong economy gives the government a growing tax base to supports its expenditures.


 
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