Q: Which of the following equations correctly represents the relationship between the federal budget deficit, government spending, and tax revenue?

$$\text{Deficit} = \text{Government Spending} - \text{Tax Revenue}$$

Question 1

Which of the following best explains why economic fluctuations in the United States have become more moderate since the 1950s?

Accepted Answer

The adoption of more appropriate monetary policy by the Federal Reserve.

Question 2

According to the adaptive expectations theory, how do individuals form their expectations about future inflation?

Accepted Answer

They base their expectations on what actually occurred during the most recent period.

Question 3

Suppose the government implements an unanticipated expansionary monetary policy. According to the rational expectations theory, what is the likely short-run effect on real output?

Accepted Answer

There will be little to no change in real output, as people quickly adjust their expectations.

Question 4

Which of the following statements about the Index of Leading Indicators is correct?

Accepted Answer

It is a composite statistic based on 10 key variables that generally turn down before a recession and up before an expansion.

Question 5

The early view of the Phillips Curve suggested a trade-off between which two economic variables?

Accepted Answer

Inflation and unemployment

Question 6

According to the modern expectational Phillips Curve, when the actual rate of inflation is less than the expected rate, what happens to unemployment?

Accepted Answer

Unemployment will be greater than its natural rate.

Question 7

If the U.S. government borrows from foreigners to finance current consumption rather than productive investment, what is the likely impact on future generations?

Accepted Answer

Future generations will be harmed because the earnings from additional capital formation will be insufficient to cover interest payments.

Question 8

Which of the following best describes the 'short-sightedness effect' in the context of federal debt?

Accepted Answer

Politicians prefer to provide immediate benefits through spending while deferring the costs to future taxpayers.

Question 9

What is the most likely way a country with a central bank, such as the U.S., would address an unsustainable level of federal debt?

Accepted Answer

By creating money to meet its debt obligations, leading to inflation.

Question 10

Suppose the federal government runs a large budget deficit during a recession. According to the materials, what is a likely consequence if this deficit is financed by borrowing from foreigners?

Accepted Answer

The U.S. trade deficit is likely to increase.

Question 11

Which of the following equations correctly represents the relationship between the federal budget deficit, government spending, and tax revenue?

Accepted Answer

$$	ext{Deficit} = 	ext{Government Spending} - 	ext{Tax Revenue}$$

Question 12

If the government implements a sustained expansionary policy, what do both adaptive and rational expectations theories predict will eventually happen?

Accepted Answer

Inflation will increase without a permanent increase in output or employment.

Question 13

During which period did the U.S. national debt as a share of GDP decline, according to the study materials?

Accepted Answer

Between World War II and 1973

Question 14

Which of the following is a practical problem with using discretionary fiscal and monetary policy to stabilize the economy?

Accepted Answer

There are significant timing lags in recognizing economic conditions and implementing policy.

Question 15

If the actual rate of inflation is greater than the expected rate, what does the modern Phillips Curve suggest about unemployment?

Accepted Answer

Unemployment will be less than its natural rate.

Question 16

Which of the following best describes the ownership of the U.S. national debt as of December 2019?

Accepted Answer

About 46.2% of privately held federal debt is owned by foreigners.

Question 17

Which of the following is a likely political reason why deficit spending is difficult to control?

Accepted Answer

Politicians prefer to provide benefits now and defer the costs to future taxpayers.

Question 18

Suppose the U.S. economy is experiencing low and steady inflation. According to the study materials, what is the likely effect on unemployment?

Accepted Answer

Unemployment rates will be low and more stable.

Question 19

Which of the following best summarizes the change in the incidence of recession in the U.S. from 1910 to 2019?

Accepted Answer

The percentage of time the economy was in recession has declined significantly.

Macroeconomic Policy, Economic Stability, and the Federal Debt: Study Notes

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