1. Multiple Choice Tutorial Chapter 32 International Trade and Finance

2. 1. The federal government budget is
a. a year-end record of how much the government received in income and how much it spent.
b. a plan for government expenditures and revenues for the coming year.
c. always in balance: receipts must equal expenditures.
d. equal to government receipts minus government expenditures.
B. The President sends his budget proposals to Congress in January. The Congress and the President have until October 1 to agree upon the next fiscal year’s budget.

3. 2. The largest single item of expenditures in the federal budget is
a. Social Security and Medicare.
b. national defense.
c. welfare.
d. interest on the debt.
A. Social Security and Medicare make up about 33% of the national budget, national defense about 18%, welfare about 15%, and interest on the debt about 15%.

4. 3. Federal spending in the mid 1990’s has been approximately what percent of GDP?
D. The federal government spends almost one quarter of all spending.

5. 4. The new fiscal year for the federal budget begins on the first day of
a. January.
b. April.
c. July.
d. October.
D. The fiscal year used to begin on June 1, but to give Congress and the President more time to finalize the budget, the fiscal year was pushed forward to October 1. So the federal fiscal year begins October 1 to September 30.

6. 5. A continuing resolution is
a. an annual determination on the part of Congress to improve the budget process.
b. a decision to maintain a specific spending level ad infinitum.
c. a temporary extension of spending authority into the new fiscal year.
d. the official name for the entire budget package when it is finally enacted.
C. When Congress and the President fail to finalize the budget by October 1, the government continues to operate based on the last years spending levels, this is called a continuing resolution.

7. 6. Which of the following is not a problem with the federal budget process?
a. the budget process is too lengthy.
b. large portions of the budget are for entitlements and cannot readily be reduced.
c. the budget is too detailed.
d. past success in balancing the budget (the budget has been balanced 3 years out of the last 4) leads to unrealistic expectations for next year.
D. The federal budget was in surplus in Only once since 1960 has the budget experienced a surplus before this.

8. 7. The Council of Economic Advisors was created by
a. the same legislation which created the Federal Reserve Board.
b. President John F. Kennedy.
c. the Employment Act of 1946.
d. the Office of Management and Budget.
C. It was shortly after WWII, which ended in 1945, when we recognized that fiscal policies should be used to foster maximum employment, production, and purchasing power in the economy.

9. 8. Which of the following is not a step in the budget process?
a. federal agencies prepare budget requests for the President.
b. the Council of Economic Advisors presents the views of the Congress to the President.
c. the President presents a budget proposal to Congress.
d. Congressional committees conduct hearings, evaluate various budget proposals, and make compromises.
B. The first step in the budget process is when the proposed budget is sent from the President to Congress in January.

10. 9. Which of the following is not an entitlement program?
a. Social Security.
b. Medicare.
c. Aid to Families with Dependent Children.
d. federal research grants.
D. Entitlement programs are guaranteed benefits for those who qualify under government transfer programs such as Social Security, Medicare, and Aid to Families with Dependent Children.

11. 10. One proposal for reforming and improving the budget process is to
a. switch to a two-year or biennial budget process.
b. remove the Council of Economic Advisors from the process.
c. require more detail in the various line items of the budget.
d. provide for automatic annual increases in all budget categories.
A. A two year cycle would give legislatures more time to debate and finalize our over 1.6 trillion dollar budget.

12. 11. Since 1960 the federal government has experienced a budget deficit every year but
a. one.
b. two.
c. three.
d. four.
A. Since the publication of your textbook, the budget was in surplus in So the book says that the answer is one, but the actual answer is two.

13. 12. An example of a capital expenditure in the present for which shifting the cost to future generations through deficit financing might be justified because those future generations will also share in its benefits is
a. Social Security.
b. interest on the debt.
c. welfare.
d. a highway.
D. Only a highway is tangible and can thus be used by future generations, the other choices produce nothing tangible.

14. 13. John M. Keynes is best known for advocating
a. a policy of annually balancing the budget.
b. deficit spending during some recessions.
c. the fixed-growth-rate monetary rule.
B. Before the Great Depression of the 1930’s Classical economics was the accepted believe. According the Classical thinking, the economy was always tending toward a full employment equilibrium, therefore there was no need for government intervention. Keynes believed that the economy could tend toward a less then full employment equilibrium, therefore, in this case, there was need for government intervention to move the economy to a full employment equilibrium.

15. 14. According the the budget philosophy known as functional finance
a. the budget should be balanced annually.
b. surpluses should be run during periods of prosperity and deficits should be run during recessions.
c. the government should not worry about whether the budget is balanced and worry instead about reaching the potential output level.
C. Functional finance is a budget philosophy aiming fiscal policy at achieving potential GDP rather than balancing budgets either annually or over the business cycle.

16. 15. An annually balanced budget
a. is the surest path to economic stability.
b. is required by the U.S. Constitution.
c. accentuates cyclical swings by increasing government spending during expansions and reducing it during recessions.
C. During certain recessions the problem is insufficient aggregate demand, so we would want the government to increase its spending. During expansions, the problem could be too much spending, so we would want the government to spend less. A mandated annually balance budget would hamper this process.

17. 16. Which of the following statements about the tax cut enacted in 1981 during the Reagan administration is correct?
a. the tax cut caused the recession of 1982.
b. the tax cut of 1981 and the recession of 1982 combined to produce one of the largest peace-time deficits up to that time.
c. the tax cut stimulated a large increase in economic activity and led directly to the balanced budget of 1982.
B. In the long run, a tax cut will increase economics growth and tax receipts. But, in the short run, the tax cut will lower government receipts. During recessions, government outlays grows while tax receipts diminish.

18. 17. The Budget Enforcement Act of 1990
a. was a package of spending cuts and tax increases designed to reduce the deficit.
b. was proposed by President Clinton.
c. immediately succeeded in balancing the budget.
A. With concern about the deficit growing, Congress and President Bush agreed to the 1990 Budget Enforcement Act, a package of spending cuts and tax increases aimed at trimming the projected deficit. Afterward, Congress ignored its promise to cut spending and Bush lost the election largely because the tax increase he agreed to went against his “read my lips, no new taxes promise.”

19. 18. President Reagan’s budget strategy in the early 1980’s included
a. all of the following.
b. cuts in Social Security.
c. increases in defense spending.
d. balancing the budget his first year in office.
C. We were at the height of the cold war with the Soviet Union during President Reagan’s term of office. This fact, along with cuts in military spending prior to Reagan’s term, led to big increases in defense spending.

20. 19. The number of states that require their own budgets to be in balance is
D. Because 49 states require an annually balanced budget, they have not experienced the debt problems the way the federal government has.

21. 20. When automatic stabilizers kick in to partially counteract recessionary forces
a. aggregate demand rises above its pre-recession level.
b. the deficit falls below its pre-recession level.
c. the government tends to have more of a deficit, which is intended to stimulate the economy.
C. An example of an automatic stabilizer is unemployment benefits. During recessions the economy experiences insufficient aggregate demand, the unemployment benefits help to increase aggregate demand.

22. 21. Every 1 percent increase in the unemployment rate increases the federal deficit by approximately
a. $20 billion.
b. $30 billion.
c. $40 billion.
d. $50 billion.
B. Recessions bring about an increase in deficits for two reasons, first government receipts go down because unemployed people do not pay taxes, second, government spending increases as benefits increase.

23. 22. Recent research suggests that each percentage point added to the unemployment rate cuts output by
a. 2 percentage points.
b. 3 percentage points.
c. 4 percentage points.
d. 5 percentage points.
A. The more the unemployment rate increases, the more demand decreases, and the more production decreases.

24. 23. The crowding out of private investment is associated with
a. increased competition from foreign investors in U.S. markets.
b. higher interest rates resulting from declining rates of saving.
c. higher interest rates resulting from increased federal borrowing.
C. Interest rates are determined by market forces. When the government increases its borrowing, demand for loanable funds increases, thus interest rates increase. This increase in interest rates makes it more difficult for investors and consumers to borrow money, thus crowding them out.

25. 24. The crowding in of private investment is associated with
a. increased investment opportunities resulting from a decline in interest rates.
b. a reduction in the level of government spending.
c. more favorable business expectations resulting from an increase in aggregate demand induced by increased government borrowing.
C. Anything that helps to spur on economic growth is favorable to increases in investments.

26. 25. Let’s say inflation remains stable and huge government budget deficits drive up market interest rates. This will cause
a. foreign investment in the U.S. to increase.
b. imports to decrease.
c. the foreign trade deficit to decrease.
d. the value of the dollar to depreciate relative to foreign currencies.
A. As interest rates in America increase relative to interests rates in foreign countries, everything else remaining the same, will give foreigners an incentive to put their money in America to take advantage of the favorable interest rates.

27. 26. Which of the following steps does not belong in a sequence reflecting the impact on international markets of increased borrowing?
a. the U.S. Treasury sells securities.
b. the sale of securities drives up interest rates.
c. the rising value of the dollar leads to increased U.S. exports and reduced imports.
C. Higher interest rates in America will attract foreign investment. But to invest in America, foreigners need American dollars, thus the demand for dollars increases in the world market, increasing the dollar’s value. Foreign products are now less expensive to Americans and American products more expensive to foreigners.

28. 27. When state and local government budgets are combined with the federal government’s budget
a. the total deficit as a percentage of potential GDP is even larger.
b. the total deficit as a percentage of potential GDP is lower than that of France, Italy, or Great Britain (UK).
c. the total deficit as a percentage of potential GDP drops slightly but is still higher than that of Japan, Canada, and Greece.
B. Even though our national debt is high, our deficits are not as high as many European countries.

29. 28. Among the following countries, which has the highest deficit as a percentage of potential GDP?
a. Germany.
b. Japan.
c. Greece.
d. Great Britain (UK).
C. Government deficits in Greece often run as high as 11% of its GDP.

30. 29. When U.S. imports exceed exports, foreigners accumulate dollars which they partially invest in assets in the United States, thereby providing all of the following except
a. an additional means of funding federal deficits.
b. a source of capital investment in U.S. cities and towns.
c. buyers for U.S. corporations and real estate.
d. a supplement to the growing U.S. saving rate.
D. With more money leaving the country than entering, U.S. savings rate will decrease.

31. 30. The national (or federal) debt is
a. the same thing as the federal deficit.
b. the accumulation of all past deficits and surpluses.
c. less than it was in 1946 if adjusted for inflation.
d. held entirely by U.S. firms and households.
B. The deficit how much we borrow in a given year. The total of the deficits adds up to the national debt.

32. 31. Until 1980, most of the national debt was the result of
a. wartime borrowing.
b. inflation.
c. bad monetary policy.
d. wasteful Congressional spending.
A. Historically most of government borrowing was the result of a war. Starting in the 1970’s, under Lyndon Johnson’s Great Society Programs, deficit spending increased year after year.

33. 32. National debt held by the public includes public debt held by all of the following except
a. banks.
b. firms.
c. the U.S. Treasury.
d. households.
C. The U.S. Treasury represents the government, debt held by the public is that portion of the U.S. government debt is held by people other than the government.

34. 33. The federal debt
a. has increased about the same amount each year for at least the past 100 years.
b. in this century has increased during World War I and World War II and has decreased in most other years.
c. in the 15 year period, , grew at least three times as much as it had grown in the preceding 200 years.
C. The combination of the increase of social spending in the 1970’s, the Viet Nam War during the 1970’s, and the increasing of military spending during the Reagan years of the 1980’s, helped to greatly increase deficits.

35. 34. Even when you take the inflation factor out of it, the federal debt grew between 1980 and 1995 at an average annual rate of
a. 2.7%.
b. 3.5%.
c. 5.4%.
d. 7.2%.
D. Using the rule of 72, 72 divided by 7.2 is exactly 10. This means that with an increase of 7.2% the national debt will double in 10 years.

36. 35. The federal debt will decline as a percentage of GDP only when
a. GDP increases more slowly than the debt increases.
b. prices are held constant.
c. GDP and the debt increase at the same rate.
d. GDP increases faster than the debt increases.
D. Whether the debt is considered high or low depends on how big it is in relation to GDP. If GDP increases more than the debt increases, the debt will decline as a percent of GDP.

37. 36. The total debt of federal, state, and local governments as a percentage of potential GDP is higher in the U.S. than in
a. all of the following:
b. Canada
c. Great Britain (UK).
d. Belgium.
C. When state and local governments are factored into the our national debt, our national debt diminishes because at least 49 states always have their budgets in balance. Even so, our national debt as a percentage of GDP is higher than in Great Britain.

38. 37. Which of the following statements is correct?
a. Only a small portion of the national debt comes due during one year.
b. Interest payments on the national debt are about 25% of the budget.
c. A one percentage point increase in the nominal interest rate increases the annual interest costs of the federal government by $40 billion.
C. With a total national debt of about $5.5 trillion, the interest paid on this every year takes about 15% of our national budget. Thus, even a one percent increase in the interest rate the government has to pay translates into a lot of money, about $40 billion more a year.

39. 38. Seigniorage in the setting of central banking and modern monetary policy means `
a. interest income earned by the Fed but returned to the U.S. Treasury after covering the Fed’s expenses.
b. interest charged by the Fed on loans to banks.
c. royalties paid by individual banks in the 19th century for the privilege of printing money.
A. The Federal Reserve is not a profit making institution. Therefore it gives back to the U.S. Treasury every year money that is made above and beyond its operating expense. This happens most every year.

40. 39. The question of who bears the burden of the debt is complicated by all of the following factors except
a. how high the interest rate paid on government loans is.
b. what the rate of unemployment in the future is.
c. how much of the publicly held debt is held by foreigners.
d. whether the borrowed funds purchase capital goods or not.
B. An increase in the unemployment rate does not change the makeup of how much any particular group owes of their debt share.

41. 40.Of the national debt held by the public, foreigners now hold about
A. This 18% of foreigners owning U.S. government debt is a big increase in recent years and complicates our debt situation.

42. 41. If government borrowing to fund farm subsidies or retirement benefits crowds out private investment in capital equipment
a. the immediate effect will be a drop in interest rates.
b. future generations will enjoy a higher standard of living.
c. the production possibilities curve will shift inward in the future because of the decline in the stock of capital goods.
C. Less investment leads to a decline in the production possibilities curve over time.

43. 42. Private investment in capital equipment in the United States
a. is unaffected by the financing of federal deficits.
b. has steadily increased relative to GDP since at least 1959.
c. has been declining relative to GDP ever since 1979.
C. This decline in spending on capital equipment is a factor that has suppressed our productivity growth rate.

44. 43. An example of a burden other than the deficit which is passed on to future generations is
a. all of the following:
b. the trade-off of military goods in place jkof civilian goods during wartime.
c. the Social Security program.
C. Because Social Security is a “pay as you go” type program, as the number of people who pay into the system declines relative to the number of people who receive benefits, the burden on those people who pay increases.

45. 44. Some economists have predicted that parents will act to offset the impact of deficit spending on their children by
a. spending more.
b. saving more to increase gifts and bequests to their children.
c. refusing to pay their taxes.
B. People who are retiring today are among the wealthiest in history. Therefore, they are in a position to leave their heirs substantial inheritance. However, people in their 20’s and 30’s today are one of the poorest in history. Thus the benefit of more inheritance is temporary.

46. 45. Which of the following would neutralize and offset the stimulating effect of deficit spending?
a. increased saving
b. increased investment spending
c. increased personal consumption expenditures
d. a decrease in taxes
A. The more people can save, the less dependant they will be on the government when they retire.

47. 46. Including the unfunded liabilities of government retirement programs like Social Security in the deficit would
a. have little impact on the size of the deficit.
b. have little impact on the size of the national debt.
c. triple the size of the national debt.
C. Social Security is unfunded because of the lack of savings by the program. Congress has replaced all savings by IOU’s that cannot be sold in the bond market, they are only redeemable by the federal government. Money owed to retirees is as much as a liability to the government as interest owed.

48. 47. One deficit-reduction measure which has wide-spread support among politicians is
a. raising taxes.
b. a substantial reduction in defense spending.
c. the line-item veto.
C. The line-item veto allows the President to veto certain lines of a budget bill. Only that portion that is not vetoed becomes law. Vetoed portions can be overridden by a 2/3 majority of the House of Representatives.

49. 48. The line-item veto
a. permits the President to veto anything at all in the budget.
b. gives the President unlimited power to balance the budget.
c. allows the President to veto specific items in the budget which are not payments otherwise required by law.
d. can be overridden in Congress by a simple majority.
C. President Clinton was the first president who was given line-item veto power.

50. 49. All of the following are objections to the balanced budget amendment to the U.S. constitution except
a. government spending could not be increased to offset a recession.
b. taxes would have to be raised in periods of recession.
c. a policy that puts too much power in the hands of the President.
C. A balance budget amendment does not give the President too much power. He has less power with this amendment because he has less control over the national budget.

51. END