Page 348 - Krugmans Economics for AP Text Book_Neat

3. Explain how each of the following events would affect the c. Tax revenue decreases.
public debt or implicit liabilities of the U.S. government, other d. The government borrows to pay interest on its current
things equal. Would the public debt or implicit liabilities be public debt.
greater or smaller?
4. Suppose the economy is in a slump and the current public debt
a. The growth rate of real GDP increases.
is quite large. Explain the trade - off of short - run versus long - run
b. Retirees live longer.
objectives that policy makers face when deciding whether or not
to engage in deficit spending.

Tackle the Test: Multiple-Choice Questions
1. If government spending exceeds tax revenues, which of the c. equal to potential output.
following is necessarily true? There is a d. falling.
I. positive budget balance. e. calculated during a recession.
II. budget deficit.
4. During a recession in the United States, what happens
III. recession.
automatically to tax revenues and government spending?
a. I only
Tax revenues Government spending
b. II only
a. increase increases
c. III only
b. decrease decreases
d. I and II only
c. increase decreases
e. I, II, and III
d. decrease increases
2. Which of the following fiscal policies is expansionary? e. decrease does not change
Taxes Government spending
5. Which of the following is a reason to be concerned about
a. increase by $100 million increases by $100 million
persistent budget deficits?
b. decrease by $100 million decreases by $100 million
a. crowding out
c. increase by $100 million decreases by $100 million
b. government default
d. decrease by $100 million increases by $100 million
c. the opportunity cost of future interest payments
e. both (a) and (d)
d. higher interest rates leading to decreased long-run growth
3. The cyclically adjusted budget deficit is an estimate of what the e. all of the above
budget balance would be if real GDP were
a. greater than potential output.
b. equal to nominal GDP.
Tackle the Test: Free-Response Questions
1. Consider the information provided below for the hypothetical
country of Zeta. Answer (8 points)
Tax revenues = 2,000 1 point: Negative
Government purchases of goods and services = 1,500
1 point: −500
Government transfers = 1,000
Real GDP = 20,000 1 point: Expansion
Potential output = 18,000
1 point: Real GDP > potential output
a. Is the budget balance in Zeta positive or negative? What is
the amount of the budget balance? 1 point: No
b. Zeta is currently in what phase of the business cycle? 1 point: Zeta is running a budget deficit during an expansion.
Explain.
c. Is Zeta implementing the appropriate fiscal policy given the 1 point: It is larger.
current state of the economy? Explain. 1 point: Because if real GDP equaled potential output, tax revenues would be
d. How does Zeta’s cyclically adjusted budget deficit compare lower and government transfers would be higher.
with its actual budget deficit? Explain.
2. In Module 29 you learned about the market for loanable funds,
which is intimately related to our current topic of budget
deficits. Use a correctly labeled graph of the market for loanable
funds to illustrate the effect of a persistent budget deficit.
Identify and explain the effect persistent budget deficits can
have on private investment.
306 section 6 Inflation, Unemployment, and Stabilization Policies