Deficits and National Debt
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Questions and Answers

Which of the following best describes government deficits?

  • The fluctuation of the debt-to-GDP ratio
  • The accumulation of government debt over time
  • The difference between government revenues and expenditures (correct)
  • The borrowing of funds from the private sector

    • What is the main source of financing for government deficits?

  • Private pension and insurance fund portfolio investments (correct)
  • Foreign investments
  • Government savings
  • Public sector borrowing

    • Why is it more likely for governments to have deficits than surpluses over long periods of time?

  • Governments prioritize spending over saving
  • Governments aim to stimulate the economy
  • Governments face unexpected expenses (correct)
  • Governments lack fiscal discipline

    • What historical events have had a major impact on the ratio of public debt to GDP for the United Kingdom?

    <p>The Napoleonic Wars and World Wars I and II</p> Signup and view all the answers

    What was the effect of the credit crisis of 2008 on government debt in the United Kingdom and the United States?

    <p>Government debt increased in both countries</p> Signup and view all the answers

    What was a concern in the financial markets in 2010 for some countries, such as Greece?

    <p>The increase in government borrowing</p> Signup and view all the answers

    What impact did the fiscal expansion by governments during the financial crisis have on the general government debt-to-GDP ratio?

    <p>It increased the ratio</p> Signup and view all the answers

    What was the change in central government debt in the United Kingdom between 2008 and 2009 according to the OECD?

    <p>It increased by USD1.2 trillion</p> Signup and view all the answers

    What was the change in central government debt in the United States between 2008 and 2009 according to the OECD?

    <p>It increased by USD1.7 trillion</p> Signup and view all the answers

    What factor has historically caused fluctuations in the ratio of public debt to GDP for the United Kingdom?

    <p>The financing of wars</p> Signup and view all the answers

    What is the effect of government borrowing on private sector investment?

    <p>Government borrowing diverts private sector investment (crowding out)</p> Signup and view all the answers

    What is the impact of larger government demands on interest rates and private sector investing?

    <p>Larger government demands lead to higher interest rates and lower private sector investing</p> Signup and view all the answers

    What is the distinction between long- and short-run effects of crowding out?

    <p>Crowding out has a significant distinction between long- and short-run effects</p> Signup and view all the answers

    What is the impact of tax distortions over the short term?

    <p>Tax distortions have a minor impact over the short term</p> Signup and view all the answers

    What is the potential impact of crowding out on capital accumulation in an economy?

    <p>Crowding out damages capital accumulation over a longer time</p> Signup and view all the answers

    What is the relationship between government borrowing and interest rates?

    <p>Government borrowing leads to higher interest rates</p> Signup and view all the answers

    What is the impact of tax distortions over many years?

    <p>Tax distortions have a significant impact over many years</p> Signup and view all the answers

    What is the potential impact of crowding out over short periods of time?

    <p>Crowding out has a minor impact over short periods of time</p> Signup and view all the answers

    What is the impact of larger government demands on private sector investing over short periods of time?

    <p>Larger government demands have no impact on private sector investing over short periods of time</p> Signup and view all the answers

    What is the impact of larger government demands on private sector investing over longer periods of time?

    <p>Larger government demands lead to lower private sector investing over longer periods of time</p> Signup and view all the answers

    What is one potential indicator for potential insolvency of a country?

    <p>The ratio of interest rate payments to GDP</p> Signup and view all the answers

    What concern arises when government spending is far in excess of revenues?

    <p>Concerns about the scale of governmental debt accumulation</p> Signup and view all the answers

    How much did government debt relative to GDP for the OECD countries overall rise from 2005 to 2015?

    <p>35.8 percent</p> Signup and view all the answers

    In Japan, how much did the ratio of government debt relative to GDP rise from 1995 to 2015?

    <p>247.4 percent</p> Signup and view all the answers

    When does the debt ratio worsen even though the economy is growing?

    <p>When the real growth in the economy is lower than the real interest rate on the debt</p> Signup and view all the answers

    What happens to the real value of the outstanding debt if the overall price level rises?

    <p>It falls</p> Signup and view all the answers

    What may happen if investors lose confidence in a government's ability to honor its debts?

    <p>Financing costs may escalate even more quickly</p> Signup and view all the answers

    What is one argument against being concerned about national debt relative to GDP?

    <p>The debt is owed internally to fellow citizens</p> Signup and view all the answers

    What may high levels of debt to GDP lead to?

    <p>Higher tax rates</p> Signup and view all the answers

    What may happen if markets lose confidence in a government?

    <p>The central bank may have to print money to finance a government deficit</p> Signup and view all the answers

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