1. An important similarity between the Keynesian model and the AD/AS model is that:
- in both models, prices change when there is a change in spending.
- both models allow for government intervention in the short run.
- both models predict that the economy will move towards full employment automatically.
- in both models, the price level stays constant when there is a change in spending.
- in both models real GDP stays constant when there is a change in spending.
2. The best definition of government debt is:
- the difference between government spending and tax revenue in any one year.
- it's always larger than the government deficit.
- the amount the government spends in any one year.
- all the money the government owes at any point in time.
- increasing when the government runs a surplus.
3. The total value of Treasury bonds (T-bonds) in existence at any point in time is:
- the federal government spending deficit.
- the trade deficit.
- less than government spending.
- necessarily less than GDP.
- the national debt.
4. If people's tax rate rises as their income rises, the tax is:
- progressive.
- proportional.
- regressive.
- a flat tax.
- discriminatory.
5. Crowding out refers to the situation in which:
- borrowing by the federal government raises interest rates, causing firms to invest less.
- foreigners sell their bonds and purchase U.S. goods and services.
- borrowing by the federal government causes state and local governments to lower their taxes.
- increased federal taxes to balance the budget cause interest rates to increase, and consumer credit decreases.
- the government purchases from foreign firms rather than domestic firms.
6. A concern about crowding out caused by increased government borrowing is that:
- interest rates on private borrowing fall.
- lower rates of economic growth can result from a decline in business investment spending.
- the federal government may default on its loans.
- foreign lenders find it less attractive to help finance federal deficits.
- the displaced private consumption will create unemployment.