Mankiw 5e Chapter 15.docx
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Mankiw 5e Chapter 15.docx
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Mankiw5eChapter15
Mankiw5eChapter15
Governmentdebtisanexampleofa
A.stock.
B.flow.
C.index.
D.capitalaccount.
1outof1
Correct.TheanswerisA.Governmentdebtmeasurestheleveloffundsowedbythegovernmentatagivenpointintime;therefore,itisastock.SeeSections2.1and15.1.
Thebudgetdeficitisanexampleofa
A.stock.
B.flow.
C.index.
D.capitalaccount.
0outof1
Incorrect.ThecorrectanswerisB.ThebudgetdeficitmeasuresthedifferencebetweenhowmuchthegovernmentspendsversushowmuchittakesintaxesPERYEAR;therefore,itisaflow.Seesections2.1and15.1.
In2001,thedebtoftheU.S.FederalGovernmentwasbetween
A.$1-$2trillion.
B.$3-$4trillion.
C.$5-$6trillion.
D.$7-$8trillion.
1outof1
Correct.TheanswerisB.In2001,thedebtoftheU.S.FederalGovernmentwas$3.2trillion.Seesection15.1.
Comparedtootherindustrializedcountries,theU.S.governmentdebtattheendofthe20thcenturywas
A.extremelylarge.
B.slightlyaboveaverage.
C.aboutaverage.
D.verysmall.
0outof1
Incorrect.ThecorrectanswerisC.Comparedto19othermajoreconomies,theU.S.wasinthemiddleofthepackintermsofthesizeofit'sgovernmentdebt.SeeSection15.1.
ThegrowthrateoftheratioofgovernmentdebttoGDPinthe1980swas
A.thelargesteverrecorded.
B.thelargesteverrecordedinpeacetime.
C.largerthanotherperiods,butnotoutoftheordinary.
D.comparabletootherpeacetimeperiods.
1outof1
Correct.TheanswerisB.AsdiscussedinSection15.1,thegrowthrateofgovernmentdebtrelativetoGDPinthe1980swasthehighesteverexperiencedintheU.S.duringpeacetime.
Supposethatthegovernmentdebtatthebeginningofacertainyearis1,000,thenominaldeficitduringthatyearis200,andinflationis5percent.Therealdeficitthenis
A.100.
B.200.
C.50.
D.150.
1outof1
Correct.TheanswerisD.Thenominaldeficitoverstatesthetruedeficitbytherateofinflationmultipliedbythestockofgovernmentdebt.Inthiscasetherealdeficitis200-(0.05x1,000)whichisequalto150.SeeSection15-2.
Considerthefollowingabridgedtableofagovernment'sfinances
Year
1994
1995
1996
Governmentpurchases
300
200
Governmentinvestment
200
300
Debt(January1)
1,000
1,250
1,500
Governmentassets(January1):
750
950
1,250
Usingthe"capitalbudgeting"method,whatwouldthegovernmentbudgetbalancehavebeenin1994and1995,respectively?
A.50deficitand50surplus
B.50surplusand50deficit
C.200surplusand300surplus
D.300deficitand200deficit
1outof1
Correct.TheanswerisA.Using"capitalbudgeting,"thedeficitiscalculatedasthechangeindebtminusthechangeinassets.Thismeansthattherewasadeficitof50in1994andasurplusof50in1995.SeeSection15-2.
Underthecurrentsystemofbudgetdeficitaccounting,anincreaseinthefuturepensionsofgovernmentworkerswould
A.raisethecurrentdeficit.
B.lowerthecurrentdeficit.
C.notaffectthecurrentdeficit.
D.raiseorlowerthecurrentdeficitdependingonthesizeoftheincrease.
1outof1
Correct.TheanswerisC.Thefuturepensionsofgovernmentworkersareexcludedfromthecurrentdeficit.Thus,anincreaseinpensionsdoesnotaffectthedeficit.SeeSection15-2.
Manyeconomistsbelievethatthecyclicallyadjustedbudgetdeficitisabettermeasurethanthedeficitthatisusuallyreportedbecausethecyclicallyadjustedbudgetdeficit
A.providesamoreaccuratemeasureofgovernmentrevenueandspending.
B.doesnotincludethenaturalrateofoutputandunemployment.
C.includeschangesinthebusinesscycle.
D.givesabetterideaoffiscalpolicystance.
0outof1
Incorrect.ThecorrectanswerisD.Thegovernmentbudgetdeficitcanchangeforbasicallytworeasons:
changesingovernmentpolicyandfluctuationsintheeconomy.Acyclicallyadjustedbudgetdeficitindicateswhatthedeficitwouldbeiftheeconomywereatitsnaturalrate,andhence,givesabetterideaoffiscalpolicystance.SeeSection15-2.
Consumersarethoughttobeforward-looking.Thisimpliesthatcurrentconsumptiondependson
A.currentaswellasfutureincome.
B.futureincomealone.
C.futureinflation.
D.futureconsumption.
1outof1
Correct.TheanswerisA.Forward-lookingconsumerswillmakeconsumptionplansbasedontheirpermanentincome.Permanentincomeisthediscountedsumofcurrentandfutureincome.Thus,currentconsumptiondependsonbothcurrentandfutureincome.SeeSection15-4.
Supposethegovernmentcutstaxeswithoutcuttingexpenditure,sothatitrunsabudgetdeficit.Itfinancesthedeficitbyborrowing.ConsumerJillreceivesa$1,000dollartaxcutandusesthemoneytobuya$1,000governmentbond.SheisafirmbelieverinRicardianequivalence.Whatistheeffectonhernetwealthandonherconsumptionbehavior?
A.Hernetwealthincreases,butherconsumptionremainsconstant.
B.Hernetwealthincreases,butherconsumptionincreasesbylessthantheincreaseinhernetwealth.
C.Hernetwealthandconsumptionbothremainconstant.
D.Hernetwealthremainsconstant,butherconsumptionincreases.
1outof1
Correct.TheanswerisC.Jillknowsthatwhenherbondcomesdue,thegovernmentwillhavetoraisehertaxesby$1,000topayforit.Therefore,thebonddoesnotmakeJillwealthierandshewillnotchangeherconsumption.SeeSection15-4.
Farovertheseas,thereisacountrycalledHypothetica,inwhichRicardianequivalencereignssupreme.SupposetheHypotheticangovernmentraisestaxestoredeemsomeofthegovernmentdebtoutstanding.Whathappenstopublicsavingandnationalsaving?
A.Publicsavingrises,butnationalsavingremainsconstant.
B.Bothpublicandnationalsavingremainconstant.
C.Publicsavingrisesandnationalsavingfalls.
D.Publicsavingfalls,butnationalsavingremainsconstant.
0outof1
Incorrect.ThecorrectanswerisA.Withnochangeingovernmentspending,publicsavinggoesupbythefullamountofthetaxincrease.Sinceconsumptionwillremainconstantwhiledisposableincomefalls,privatesavingwillfallbythesameamountthatpublicsavingrises.SeeSection15-4.
Ricardianequivalencedoesnotimplythatfiscalpolicyisirrelevant.ApolicyactionbythegovernmentthatwillALWAYSaffectconsumerbehavior,regardlessofwhathappenstoothervariables,isanincreasein
A.currenttaxes.
B.futuretaxes.
C.governmentdebt.
D.governmentpurchases.
1outof1
Correct.TheanswerisD.Changesingovernmentpurchaseswillaffectconsumerbehavior.SeeSection15-4.
IfRicardianequivalenceholdsandthegovernmentcutstaxeswithoutanyplanstoreducegovernmentspending,thenaforward-lookingconsumerwould
A.increaseconsumptionbythesameamountasthetaxcut.
B.increaseconsumptionbythetaxcuttimesthemarginalpropensitytoconsume.
C.leaveconsumptionunchangedinordertosaveforfuturetaxes.
D.decreaseconsumptioninordertosaveforfuturetaxes.
1outof1
Correct.TheanswerisC.SeeSection15-4foradiscussionoftheimplicationsofRicardianequivalence.
Supposeaconsumerlooksonlyathiscurrentdisposableincometomakehisconsumptiondecisionsbecauseheistoolazytolookfurtherintothefuture.Thisisanexampleof
A.myopia.
B.borrowingconstraints.
C.Ricardianequivalence.
D.theimportanceoffuturegenerations.
1outof1
Correct.TheanswerisA.Consumerswhoarenotforward-lookingaremyopic.SeeSection15-4.
ThemodelofconsumptionbehaviorthatunderliestheRicardianviewofgovernmentdebtisthe
A.life-cycle/permanent-incomemodel.
B.Keynesiancross.
C.cash-flowmodel.
D.credit-rationingmodel.
1outof1
Correct.TheanswerisA.SeeSection15-4foranexplanationoftheRicardianviewofgovernmentdebt.
UnderRicardianequivalence,ataxcuttodaywillraiseconsumptionif
A.taxesareraisedinthefuture.
B.governmentspendingisreduced.
C.governmentspendingisincreased.
D.consumersareforward-looking.
1outof1
Correct.TheanswerisB.Ifgovernmentspendingisreduced,peopleexpectthattaxeswillnotberaisedinthefuture.SeeSection15-4.
Supposeconsumersexpectthatfuturetaxrateswillbethesameascurrenttaxrates.Thisisanexampleof
A.rationalexpectations.
B.myopia.
C.taxsmoothing.
D.intertemporalsubstitution.
0outof1
Incorrect.ThecorrectanswerisB.Consumersareshort-sightedinthisexample;theyfailtotakeaccountoffuturechangesintaxesimpliedbycurrentgovernmentpolicies.SeeSection15-4.
Choosethepairofphrasesthatbestcompletesthissentence:
IfRicardianequivalenceholdsandthegovernmentcutstaxeswithoutreducinggovernmentspending,consumptionwill_________becausepeoplewill_________higherfuturetaxes.
A.rise;expect
B.rise;notexpect
C.notrise;expect
D.notrise;notexpect
1outof1
Correct.TheanswerisC.Intheabsenceofdefault,thegovernmentmustraisetaxesinthefuture.Ifconsumersareforward-looking,astheyareunderRicardianequivalence,theywillnotincreaseconsumptionbecausetheyexpecthigherfuturetaxes.SeeSection15-4.
SupposethatCongresscreatesabudgetdeficitbycuttingtaxes.Furthermore,itplanstopayoffthedeficitbyraisingtaxesinthefuture.AccordingtotheRicardianviewofgovernmentdebt,thetaxcutwouldNOTaffectcurrentconsumptionplansbecausethe
A.taxcutdoesnotaffecttemporaryincome.
B.taxcutdoes
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