In the late 1990s, the U.S. federal budget moved into surplus while the U.S. trade deficit grew larger.
Correct Answer
True
True. During those years the budget and trade balances moved in opposite directions, as foreign financial capital flowed in to fund private investment rather than government borrowing. This shows that budget and trade deficits do not always move together.
Category: Twin Deficits
Question 2
In the first half of the 2000s, the U.S. budget deficit and trade deficit both increased.
Correct Answer
True
True. After the budget returned to deficit in the early 2000s, both the budget deficit and the trade deficit grew, a twin deficits pattern. Other periods, such as the late 1990s, showed the two moving apart.
Category: Twin Deficits
Question 3
Other things equal, a larger government budget deficit tends to push interest rates higher.
Correct Answer
True
True. Greater government borrowing adds to the demand for financial capital, raising the equilibrium interest rate if nothing else changes. Higher rates discourage private firms from borrowing to invest, which is one channel of crowding out.
Category: Crowding Out and Growth
Question 4
On-the-job training provided by employers is a private-sector investment in human capital.
Correct Answer
True
True. Human capital is the skills and knowledge of workers, and firms build it when they train their own employees. The public sector's counterpart is public education and government job training.
Category: Public Investment
Question 5
Paying for a public investment project with borrowing rather than with taxes can crowd out private investment in physical capital.
Correct Answer
True
True. Borrowing adds to the demand for financial capital and leaves less for private firms, unless private saving or foreign inflows rise to fill the gap. Financing the project with taxes or spending cuts avoids this direct crowding out, though higher taxes can reduce private saving.
Category: Public Investment
Question 6
Long-run economic growth depends on investment in physical capital, human capital, and new technology.
Correct Answer
True
True. These three sources of growth, operating in markets with flexible prices, raise the economy's productive capacity over time. Fiscal policy can support each one but can also hurt private investment through large, sustained deficits.
Category: Crowding Out and Growth
Question 7
After the 2008-2009 recession, crowding out appeared weak, partly because the Federal Reserve held interest rates very low.
Correct Answer
True
True. Large deficits at that time did not push up interest rates much, because the central bank kept rates very low and firms had little desire to invest during the weak recovery. Crowding out tends to matter more when the economy is near potential GDP.
Category: Crowding Out and Growth
Question 8
Large budget deficits helped set the stage for financial crises in several countries that relied heavily on foreign investors to fund them.
Correct Answer
True
True. In several cases, foreign funds first poured in to buy government debt and then fled on bad news, causing the currency to depreciate sharply and the economy to fall into recession. Heavy reliance on short-term foreign borrowing makes a country vulnerable to such reversals.
Category: Twin Deficits
Question 9
Ricardian equivalence predicts that when a government runs a budget surplus, households will tend to save less.
Correct Answer
True
True. Households expect a surplus to mean lower future taxes, and the lower interest rates it brings make saving less attractive, so private saving falls. Under complete Ricardian equivalence the drop in private saving would exactly match the surplus.
Category: Ricardian Equivalence
Question 10
Rising interest payments on a large national debt can force a government into spending cuts or tax increases that slow the economy.
Correct Answer
True
True. As debt and interest rates rise, more of the budget goes to interest, which can require painful spending cuts or tax increases. Those moves are contractionary and can hurt growth.
Category: Crowding Out and Growth
Question 11
Because budget deficits and trade deficits are linked through the national saving and investment identity, a larger budget deficit must produce an equally larger trade deficit.
Correct Answer
False
False. The identity requires that a larger budget deficit be matched by some combination of higher private saving, lower private investment, or a larger trade deficit. Because private saving and investment can adjust, the trade deficit need not change by the same amount, which is why the twin deficits are described as more like cousins than twins.
Category: Twin Deficits
Question 12
Research and development aimed at defense and space tends to benefit civilian industries more than civilian research does.
Correct Answer
False
False. Defense and space research does produce some spillovers, but it benefits civilian industries less than research aimed directly at civilian uses. That is one reason the mix of R&D spending matters for growth.
Category: Public Investment
Question 13
U.S. statistical studies find that private saving rises by more than one dollar for each additional dollar of government borrowing.
Correct Answer
False
False. Studies suggest private saving rises by only about 30 cents for each extra dollar of government borrowing, a partial offset. Ricardian equivalence therefore holds only partly, so government borrowing still affects investment and the trade balance.
Category: Ricardian Equivalence
Question 14
Public education and job training programs are examples of government investment in physical capital.
Correct Answer
False
False. Education and job training build workers' skills, which makes them investments in human capital. Government investment in physical capital includes roads, bridges, water systems, and airports.
Category: Public Investment
Question 15
In an economy with a government sector and foreign trade, private investment must always equal private saving.
Correct Answer
False
False. Private investment equals private saving plus public saving plus the inflow of foreign saving, I = S + (T - G) + (M - X). Investment equals private saving alone only if the budget and the trade balance happen to net to zero.
Category: Saving and Investment Identity
Question 16
Growth-oriented fiscal policies, such as improving education and building infrastructure, tend to raise output almost immediately.
Correct Answer
False
False. Policies aimed at long-run growth take effect gradually, as students finish school, infrastructure is completed, and new technologies develop. Their payoff comes over years or decades, not right away.
Category: Crowding Out and Growth
Question 17
Public infrastructure projects face stronger market discipline than private investments, so political influence plays little role in which ones are built.
Correct Answer
False
False. Private firms face market discipline because a failed investment loses money, but public projects can be shaped by politics. Projects may be steered to favored districts or contractors, and useful projects may be skipped because they lack political appeal.
Category: Public Investment
Question 18
Additional investment in human capital is unlikely to raise productivity in low-income countries.
Correct Answer
False
False. Human capital is especially important for low-income countries, where more education is likely to raise productivity and growth substantially. For high-income countries the focus is more on getting better results from existing spending.
Category: Public Investment
Question 19
In the mid-1980s, the U.S. federal budget deficit rose while the U.S. trade deficit shrank.
Correct Answer
False
False. In the mid-1980s both deficits rose together: the budget deficit grew as a share of GDP and the trade deficit grew as well. That period is a classic example of twin deficits.
Category: Twin Deficits
Question 20
The national saving and investment identity applies only to economies that do not trade with other countries.
Correct Answer
False
False. The identity explicitly includes foreign trade through the term M - X, the trade deficit, which equals the inflow of foreign financial capital. It applies to open economies and shows how trade balances connect to saving and investment.
Category: Saving and Investment Identity