C.15 Fiscal Policy and the Government Budget in the Long Run

Question 1

Net federal debt

Answer 1

The dollar value of gross federal debt minus government financial assets

Question 2

Primary budget deficit (PD)

Answer 2

Govn’t purchases of goods and services plus transfer payments minus tax revenue

Question 3

Ricardian equivalence

Answer 3

The theory that forward-looking households fully anticipate the future taxes required to pay off government debt, so that reduction in lump-sum taxes have no effect on the economy

Question 4

Sustainable fiscal policy

Answer 4

A situation in which the debt-to-GDP ratio is constant or decreasing

Question 5

Unsustainable fiscal policy

Answer 5

A situation in which the debt-to-GDP ratio is increasing

Question 6

Printing more money raises ______

Answer 6

nominal interest rates

Question 7

Ways to finance a govt budget deficit

Answer 7

lower private investment, lower consumption, lower net exports

Question 8

Persistent government surplus results in _____ long-term real interest rates

Answer 8

lower