AP Econ Module 30 Deficits Debt - Sunny Hills High School

3. Explain how each of the following events would affect che
public debr or implicir liabilities ofthe U.S. govemmenr, orher
rhings equal. Would the public debc or implicit liabilities be
greater or smaller?
a- The growth rate ofreal GDp increases.
b. Retirees live longer.
Tackle the Test Muttiple-Choice Questions
1. Ifgovernment spending exceeds tax revenues, which ofthe
following is necessarily rrue? There is a
I. positive budget balance.
II. budger deficit.
IIL recession.
a. I oriy
b. II only
c. III only
d. I and II only
e. I,II, and III
2. Which ofthe following fiscal policies is expansionary?
Goremfient spendihg
a- increase by $100 million increases by $100 million
b. decrease by $100 million decreases by $100 million
c. increase by $100 million decreases by$100 miltion
d. decrease by $100 million increases by$100 million
e. both (a) and (d)
3. The cyclically adjusted budget deficit is an estimare ofwhar che
budger balance would be ifreal GDp were
a. greater than potencial ourput.
b. equal to nominal GDP.
Tackle the Test Free-Response Questions
1. Consider rhe information provided below for rhe hypothetical
co]ufitry of Zeaa.
Tax revenues = 2,000
Government purchases ofgoods and services = 1,500
Government transfers = 1,000
Reat GDP = 20,000
Po.enrialourpur= 18,000
a- Is rhe budget balance in Zeta positive or negative? at is
the amount ofthe budget balance?
b. Zeta is currenaly in whar phase of the business cycle?
Explain.
c. Is Zeta implemenring the appropriate fiscal poliry given the
current state ofthe economy? Explain.
d. How does Zerts cyclically adjusted budget deEcir compare
with irs actual budget deficit? Explain.
c, Tax revenue decreases.
d. The government bortows to pay interest on ias cuffent
public debr.
4. Suppose rhe economy is in a slump and the current public debt
is quire large. Explain the trade-offofshorr-run versus long_run
objectives that policy makers face when deciding whether or nor
to engage in deficit spending.
c. equal co potenrial output.
d. falling.
e. calculated during a recession.
4. During a recession in rhe United States, whar happens
automatically ro ta,r revenues and government spending?
T.lt reltenues
Goltethtuent spehding
a. inctease
increases
b. decrease
c. increase
decreases
decreases
d. decrease
e. decrease
increases
does not change
5. Which ofthe following is a reason co be concerned about
persistent budger defi cits?
a. crowding out
b. govemmenr defaulr
c. the opportunity cost olfirture interest paymenrs
d. higher interest rares leading to decreased long,run growch
e. all oF the above
Answer (8 points)
1 point Negative
1 point -500
1 point Expansion
1 point Real cDP > potentiat output
l point No
1 point Zeta is runninq a budget deflcit during an expansion.
1 point lt is larger.
1 point Because if real GDP equaled poten al output, tax revenues would be
lowerand government transfurs would be higher.
306 section 6 lntlation, Unemptoyment, and
Stabilization Policies
2. In Module 29 you learned abour rhe market fi:r loanable funds,
which is inrimarely relared ro our current topic ofbudget
deficits. Use a correcrly labeled graph ofthe marker for loanable
funds co illusrrate the effecr ofa persistent budger deficit.
Idenrifyand explain rhe effecc persistent budget deficits can
have on private invescment.