Federal Deficits Quiz

Suppose that the president faces an economy plagued by stagflation. Output is predicted to drop steadily over the next two quarters. Unemployment is at record levels. If there is a deficit, and the president, under these circumstances, endeavors to balance the budget, which of the following will MOST LIKELY result?

• Inflation will continue, but unemployment will drop.
• Inflation may be relieved somewhat, but unemployment will be seriously aggravated.
• The predicted decline in output will not occur, though there will be no immediate effects on inflation or unemployment.
• Inflation will be seriously aggravated through increased output, but unemployment will rise.

A budgetary policy which states that the government’s budget should be set to promote a socially optimal combination of unemployment and inflation is known as:

• the full-employment budget theory.
• counter-cyclical policy.
• functional finance.
• the structural deficit philosophy.

Suppose that the actual federal budget shows a deficit. But the full-employment budget, by contrast, shows a surplus. As an economic adviser who agrees with the thinking of most 1980s economists, you would MOST LIKELY conclude from this comparison that:

• the full-employment budget isn’t as useful a tool as earlier generations have made it out to be.
• the actual budget should be revised to reflect what the full-employment budget shows.
• government spending should be curtailed severely.
• current fiscal policy is probably doing a fair job of stabilizing the economy.

Again using the circumstances in the previous question, as an economic adviser you would probably attribute the deficit shown in the actual budget to:

• unemployment.
• unchecked government spending.
• depressed consumer demand.
• incomplete data.

Following World War II, Americans had a great deal of money to spend for the first time in many years. However, there were few commodities—even necessities—available for purchase. During this period, many economists feel that severe unemployment and even a recurrence of the Depression might have resulted except for the fact that:

• the government borrowed heavily to finance the war debt.
• consumers agreed to restrict both spending and investment.
• increased taxes held spending in check.
• excess resources were diverted from wartime production into civilian production.

True or false: A counter-cyclical policy calls for budget surpluses in bad times to provide a strong reserve, and budget deficits in good times to keep things moving.

• True
• False