Question

1. In the short-run framework, budget deficits should:

a. never be run since they slow economic growth over the long run.

b. never be run since they crowd out investment in the short run.

c. be run on a temporary basis whenever the economy is below potential output.

d. be run on a permanent basis since they can always be financed by printing money.

2. In the long-run framework, budget surpluses:

a. should be run whenever output dips below potential output.

b. should never be run since they crowd out investment in the short run.

c. are better than budget deficits over the long run because unlike budget deficits, they increase saving and investment.

d. should be run on a permanent basis since they boost saving and investment and stimulate economic growth.

3. A budget deficit is defined as:

a. a shortfall of revenues compared to expenditures.

b. a shortfall of expenditures compared to revenue.

c. accumulated deficits minus accumulated surpluses.

d. accumulated surpluses minus accumulated deficits.

4. When the government runs a deficit, it will:

a. buy bonds to finance the deficit.

b. sell bonds to finance the deficit.

c. reduce the money supply to finance the deficit.

d. raise taxes immediately.

Answer 1

1. c. be run on a temporary basis whenever the economy is below potential output.
(In SR, deficits should be temporary when there is recessionary gap.)

2. c. are better than budget deficits over the long run because unlike budget deficits, they increase saving and investment.
(In LR, surpluses are better than deficits as they increases savings and investment.)

3. a. a shortfall of revenues compared to expenditures.
(Deifict is expenditures - revenues > 0.)

4. b. sell bonds to finance the deficit.
(During deficit, government sells bonds to finance it.)