1. True or false: When the federal government runs a budget deficit (i.e., G > T) this is made
possible by the government buying Treasury securities from the public.
2. If the federal government borrows to finance a budget deficit, which of the following will
occur?
a. The government finds itself in competition with the private sector for scarce financial
resources with the result that interest rates increase, ceteris paribus.
b. The private sector is crowded out.
c. Savings increase as interest rates get bid up.
d. All of the above.
e. None of the above.
3. In an ideal world, a well-designed fiscal policy stimulus (some combination of government
spending increases and tax cuts) that is attempting to pull the economy out of a recession
would accomplish which of the following?
a. It would create jobs.
b. It would return consumer spending to normal levels.
c. It would increase productivity and thus help to be self-financing.
d. All of the above.
e. None of the above.
4. True or false: Suppose there is a decrease in investment demand, resulting in a recessionary
gap. The appropriate countercyclical (demand-management) policy actions that involve both
monetary and fiscal policy that would work together to return the economy to full
employment would involve an increase in the money supply and a decrease in taxes.
5. Suppose that the government is pursuing a countercyclical fiscal policy stimulus (consisting of
government spending increases and tax cuts) to return the economy to full employment,
ceteris paribus. Which of the following represents a potential outcome if the government
pursues that policy too aggressively and/or for too long?
a. An inflationary gap is possible.
b. The resulting increases in real output stop short of the full employment level.
c. Interest rates decline.
d. All of the above.
e. None of the above.
6. True or false: There is more crowding out of the private sector when government borrowing
to finance a budget deficit is accompanied by a monetary increase (than without the
increase), ceteris paribus.
