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Special Topic 5

The Federal Budget and the National Debt

1.Which of the following is true?

a.A budget deficit will reduce the national debt.

b.A budget deficit will increase the national debt.

c.A balanced budget will increase the national debt.

d.A budget surplus will increase the national debt.

2.In 2003, more than half of the national debt was held by

a.foreign investors.

b.Federal Reserve banks.

c.large corporations.

d.government trust funds and the Federal Reserve system.

3.It is important to distinguish between the privately held portion of the national debt and the portion held by government agencies and the Federal Reserve system because

a.the government will not have to repay the privately held debt.

b.only the privately held debt creates a net interest liability for the federal government.

c.the privately held debt does not create a net interest liability for the federal government.

d.taxes will have to be raised in order to pay the interest on the debt held by the Federal Reserve system.

4.(I) The traditional, or crowding-out, view holds that budget deficits cause high interest rates, reducing private investment and the formation of the capital stock.

(II) The new classical view holds that people view government borrowing as higher future taxes and thus save more in response to budget deficits. In this view, interest rates should remain unchanged by the size of the deficit.

a.I is true; II is false.

b.I is false; II is true.

c.Both I and II are true.

d.Both I and II are false.

5.How does inclusion of the current revenues and expenditures of the Social Security trust fund into the budget calculation affect the reported budget deficit of the federal government?

a.It increases the reported deficit.

b.It reduces the reported deficit.

c.It exerts no effect on the reported deficit.

d.It increases the deficit during an economic boom but reduces it during a recession.

Answer Key 1 through 5

*1. (b), 2. (d), 3. (b), 4. (c), 5. (b)

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