Gross Domestic Product Quiz Questions

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  • 1/37 Questions

    The financial crisis of 2008 led to massive federal spending in an effort to stimulate the economy. The combination of the new federal spending and the automatic stabilizers led to

    • The largest budget deficit since World War II.
    • The highest rate of inflation since the Great Depression.
    • A higher government debt-to-GDP ratio than at any time in American history.
    • A deficit that is expected to remain permanently at ten percent or more of GDP.
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Gross Domestic Product Quiz Questions - Quiz
About This Quiz

Explore the intricacies of government spending, debt, and economic growth with the Gross Domestic Product quiz. Assess your understanding of fiscal policies, their impact on the economy, and how they relate to public finance.

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  • 2. 

    Interest rates on government bonds are relatively low because:

    • Interest rates on government bonds are relatively low because:

    • The debt-to-GDP ratio is almost zero.

    • U.S. government bonds are considered one of the safest assets in the world.

    • Many are worried about the U.S. government's defaulting.

    Correct Answer
    A. U.S. government bonds are considered one of the safest assets in the world.
    Explanation
    The correct answer is that U.S. government bonds are considered one of the safest assets in the world. This is because the U.S. government has a strong track record of repaying its debt and is seen as a reliable borrower. As a result, investors are willing to accept lower interest rates on these bonds in exchange for the security and stability they offer. The fact that the debt-to-GDP ratio is almost zero and that many are worried about the U.S. government defaulting are not directly related to the low interest rates on government bonds.

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  • 3. 

    As the interest rate rises, debt service:

    • Decreases.

    • Does not change, but debt increases.

    • Increases.

    • Does not change and neither does the debt.

    Correct Answer
    A. Increases.
    Explanation
    As the interest rate rises, debt service increases. This is because a higher interest rate means that borrowers have to pay more in interest on their loans. As a result, the debt service, which refers to the amount of money required to meet the interest and principal payments on a debt, increases. Therefore, a higher interest rate leads to an increase in debt service.

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  • 4. 

    Debt service payments by the government:

    • Are used to purchase goods and services.

    • Are a payment for past expenditures.

    • Do not burden the generations that must make them.

    • Have fallen continuously since World War II.

    Correct Answer
    A. Are a payment for past expenditures.
    Explanation
    Debt service payments by the government refer to the payments made to cover the principal and interest on borrowed funds. These payments are made to fulfill past expenditures that were financed through borrowing. Therefore, the correct answer is "are a payment for past expenditures."

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  • 5. 

    What makes it possible for a country to maintain a constant debt-to-GDP ratio and still have continual deficits is:

    • Positive private savings.

    • Trade surpluses.

    • Continual inflation.

    • Real economic growth.

    Correct Answer
    A. Real economic growth.
    Explanation
    Real economic growth allows a country to maintain a constant debt-to-GDP ratio while still running deficits because it increases the overall size of the economy. When the economy grows, the country's GDP increases, which means that even if the debt also increases, it remains a smaller proportion of the overall economy. This allows the country to manage its debt while still experiencing deficits. Positive private savings, trade surpluses, and continual inflation do not directly address the issue of maintaining a constant debt-to-GDP ratio.

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  • 6. 

    The U.S. Treasury Department reported that in December 2009 the total debt of the United States was approximately $10.7 trillion. The amount of government debt held by private investors was approximately $5.9 trillion. The difference between these two is debt

    • Held by U.S financial institutions.

    • Held by foreigners

    • Held by some parts of the government itself.

    • That has been adjusted for the effects of inflation.

    Correct Answer
    A. Held by some parts of the government itself.
    Explanation
    The U.S. Treasury Department reported that in December 2009, the total debt of the United States was approximately $10.7 trillion. The amount of government debt held by private investors was approximately $5.9 trillion. The difference between these two indicates that some parts of the government itself hold the remaining debt. This means that the government has borrowed money from itself, such as from trust funds or other government agencies, to finance its operations.

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  • 7. 

    External government debt is:

    • Government debt owed to its own citizens.

    • Government debt owed to individuals in foreign countries.

    • Government debt owed by one branch of the government to another.

    • Debt that individuals in foreign countries owe to the U.S. government.

    Correct Answer
    A. Government debt owed to individuals in foreign countries.
    Explanation
    External government debt refers to the amount of money that a government owes to individuals or entities in foreign countries. This type of debt is different from government debt owed to its own citizens or debt owed by one branch of the government to another. In the context of the given options, external government debt specifically refers to the debt owed by a government to individuals in foreign countries.

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  • 8. 

    GDP provides an indication of:

    • How much interest will have to be paid on the national debt.

    • How big a national debt a country can handle.

    • The inflation-adjusted burden of a country's debt.

    • How much of a country's debt is external rather than internal

    Correct Answer
    A. How big a national debt a country can handle.
    Explanation
    GDP provides an indication of how big a national debt a country can handle because it measures the total value of goods and services produced within a country's borders in a specific time period. A higher GDP indicates a stronger economy and a greater ability to generate revenue to repay debts. Therefore, a country with a higher GDP can generally handle a larger national debt compared to a country with a lower GDP.

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  • 9. 

    Which of the following is a reason why government debt is different from individual debt?

    • Government has fewer sources of income to finance its debt than individuals.

    • Government can create money to finance its debt.

    • Government debt can be owed to foreigners, unlike the debt of individuals.

    • Government debt must be repaid at some point in time.

    Correct Answer
    A. Government can create money to finance its debt.
    Explanation
    Government debt is different from individual debt because the government has the ability to create money to finance its debt. Unlike individuals, who must rely on their income and assets to repay their debts, the government has the power to print and control the supply of money. This means that the government can essentially "create" money to pay off its debts, which individuals cannot do. This ability gives the government more flexibility in managing its debt and potentially avoiding default.

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  • 10. 

    GDP provides an indication of:

    • How much interest will have to be paid on the national debt.

    • How big a national debt a country can handle.

    • The inflation-adjusted burden of a country's debt.

    • How much of a country's debt is external rather than internal.

    Correct Answer
    A. How big a national debt a country can handle.
    Explanation
    GDP provides an indication of how big a national debt a country can handle. This is because GDP represents the total value of goods and services produced within a country's borders in a given period. A higher GDP indicates a stronger economy, which means that the country has a larger capacity to generate income and repay its debts. Therefore, GDP serves as a measure of a country's economic strength and its ability to manage and sustain a national debt.

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  • 11. 

    If the debt of the federal government decreases by $20 billion in one year the budget

    • Deficit in that year must be $20 billion.

    • Surplus in that year must be $20 billion.

    • Deficit in that year decreases by $20 billion.

    • Surplus in that year increases by $20 billion.

    Correct Answer
    A. Deficit in that year decreases by $20 billion.
    Explanation
    If the debt of the federal government decreases by $20 billion in one year, it means that the government is paying off its debt and reducing its overall borrowing. This reduction in debt indicates that the government is spending less than it is earning in revenue, resulting in a decrease in the budget deficit. Therefore, the correct answer is that the deficit in that year decreases by $20 billion.

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  • 12. 

    If government has no debt initially but then has annual revenues of $1.5 billion for 10 years and annual expenditures of $1.6 billion for 10 years, then the government has a:

    • Deficit of $100 million per year and a debt of $1 billion.

    • Surplus of $100 million per year and a debt of $1 billion.

    • Deficit of $100 million and a debt of $1 billion per year.

    • Surplus of $100 million and a debt of $1 billion per year.

    Correct Answer
    A. Deficit of $100 million per year and a debt of $1 billion.
    Explanation
    The government has a deficit of $100 million per year because its annual expenditures of $1.6 billion exceed its annual revenues of $1.5 billion. This deficit accumulates over the 10-year period, resulting in a debt of $1 billion.

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  • 13. 

    If the nominal deficit is $200 billion, the real deficit is $180 billion, and total debt is $2 trillion, then inflation is:

    • 1 percent.

    • 1 percent.

    • 4 percent.

    • 5 percent.

    Correct Answer
    A. 1 percent.
    Explanation
    If the nominal deficit is $200 billion and the real deficit is $180 billion, it means that the inflation rate can be calculated by subtracting the real deficit from the nominal deficit and dividing it by the total debt. In this case, the inflation rate would be ($200 billion - $180 billion) / $2 trillion = $20 billion / $2 trillion = 0.01 or 1 percent.

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  • 14. 

    Which of the following will decrease the nominal deficit?

    • An increase in taxes.

    • An increase in government expenditures.

    • An increase in interest rates.

    • An increase in the debt.

    Correct Answer
    A. An increase in interest rates.
    Explanation
    An increase in interest rates will decrease the nominal deficit because it will result in higher borrowing costs for the government. This means that the government will have to pay more interest on its debt, leading to a larger portion of the budget being allocated towards interest payments. As a result, there will be less money available for other government expenditures, thereby reducing the nominal deficit.

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  • 15. 

    The passive surplus is $450 billion, potential output is $10 trillion and tax rate is 15 percent. With this information, we can infer that the actual output of this economy is:

    • $13 trillion

    • $13.5 trillion

    • $6 trillion

    • $6.5 trillion

    Correct Answer
    A. $13 trillion
    Explanation
    Given that the passive surplus is $450 billion and the tax rate is 15 percent, we can calculate the potential tax revenue by multiplying the passive surplus by 100 and dividing it by the tax rate. This gives us $3 trillion. Since the potential output is $10 trillion, we can calculate the actual output by adding the potential tax revenue to the potential output. Therefore, the actual output of this economy is $13 trillion.

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  • 16. 

    Suppose that the economy has a structural deficit of $200 billion but is running a budget surplus. It follows that:

    • There is no passive deficit or surplus.

    • There is a passive surplus.

    • There is a passive deficit.

    • The passive deficit cannot be determined without more information

    Correct Answer
    A. There is a passive surplus.
    Explanation
    If the economy has a structural deficit of $200 billion but is running a budget surplus, it means that the actual deficit is lower than the structural deficit. This implies that there is a passive surplus, as the budget surplus is offsetting part of the structural deficit.

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  • 17. 

    The government decides to increase its expenditures by $250. The multiplier in this economy is 4 and the tax rate is 22 percent. The net effect of this expansionary fiscal policy is to:

    • Increase the budget deficit by $30.

    • Increase the budget deficit by $220.

    • Decrease the budget deficit by $30.

    • Decrease the budget deficit by $220.

    Correct Answer
    A. Increase the budget deficit by $220.
    Explanation
    When the government increases its expenditures by $250, it will have a multiplier effect on the economy. The multiplier of 4 means that the total increase in output will be 4 times the initial increase in government spending, which is $250 x 4 = $1000. However, the tax rate of 22 percent means that the government will collect $220 in taxes from this increase in output. Since the government spending has increased by $250 but it has collected $220 in taxes, the net effect is an increase in the budget deficit by $220.

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  • 18. 

    Suppose potential income is $60 billion, actual income is $40 billion, and expenditures don't vary with income. If the actual budget deficit is $4 billion and the marginal tax rate is 20 percent, the structural deficit:

    • Is zero.

    • Is between zero and $4 billion.

    • Is $4 billion.

    • Cannot be determined from the given information.

    Correct Answer
    A. Is zero.
    Explanation
    The structural deficit refers to the portion of the budget deficit that would still exist even if the economy were at full potential income. In this scenario, the potential income is $60 billion and the actual income is $40 billion. Since the actual income is lower than the potential income, it means that the economy is not at full capacity. Therefore, the structural deficit would be zero, as it is the difference between the potential income and the actual income.

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  • 19. 

    If a passive surplus exists, the economy must be:

    • At potential income.

    • Above potential income.

    • Above potential income.

    • Experiencing deflation.

    Correct Answer
    A. Above potential income.
    Explanation
    If a passive surplus exists, it means that the total income in the economy is higher than the potential income. Potential income refers to the maximum level of income that can be achieved when all resources are fully utilized. Therefore, if there is a passive surplus, it indicates that the economy is operating above its potential income level. This could be due to factors such as increased government spending, high levels of investment, or excessive consumer spending.

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  • 20. 

    In the long-run framework, deficits reduce:

    • Investment.

    • Government consumption.

    • Taxes.

    • Subsidies.

    Correct Answer
    A. Investment.
    Explanation
    In the long-run framework, deficits reduce investment because when a government runs a deficit, it needs to borrow money to finance its spending. This leads to an increase in the government's debt, which can crowd out private investment by increasing interest rates and reducing the availability of funds for private investment. Additionally, deficits can also create uncertainty about future taxes and government policies, which can further discourage private investment. Therefore, deficits have a negative impact on investment in the long run.

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  • 21. 

    Suppose you are negotiating a cost of living raise with your boss. Under which of the following circumstances would you ask for the largest raise?

    • Federal Reserve policy lowers the unemployment rate below the natural rate.

    • Federal Reserve policy raises the unemployment rate above the natural rate.

    • Federal Reserve policy targets inflation at its current value.

    • Federal Reserve policy targets inflation at levels below its current value.

    Correct Answer
    A. Federal Reserve policy lowers the unemployment rate below the natural rate.
    Explanation
    When the Federal Reserve policy lowers the unemployment rate below the natural rate, it indicates that the economy is performing exceptionally well and there is a high demand for labor. In such circumstances, employees have more bargaining power and can ask for a larger raise as their skills are in high demand. This is because employers will be willing to pay more to retain their valuable employees and attract new talent.

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  • 22. 
    What should the Federal Reserve do if it wants to move from point A to point B in the short-run Phillips curve depicted in the figure above? - ProProfs

    What should the Federal Reserve do if it wants to move from point A to point B in the short-run Phillips curve depicted in the figure above?

    • Buy treasury bills

    • Sell treasury bills

    • Lower the discount rate

    • Increase the money supply

    • Lower taxes

    Correct Answer
    A. Sell treasury bills
    Explanation
    To move from point A to point B in the short-run Phillips curve, the Federal Reserve should sell treasury bills. Selling treasury bills would reduce the money supply in the economy, leading to a decrease in aggregate demand. This decrease in aggregate demand would cause a decrease in inflation and a decrease in the unemployment rate, ultimately moving the economy from point A to point B on the Phillips curve.

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  • 23. 

    Suppose workers bargain for a new contract that gives them a 5 percent pay increase over the next year. If they expected no inflation but inflation is in fact 2 percent, inflation makes:

    • Both workers and firms worse off.

    • Workers worse off and firms better off.

    • Workers better off and firms worse off.

    • Both workers and firms better off.

    Correct Answer
    A. Workers worse off and firms better off.
    Explanation
    Inflation erodes the purchasing power of money over time. If workers expect no inflation but it is actually 2 percent, their 5 percent pay increase will be effectively reduced to 3 percent in real terms. This means that workers are worse off as their increase in wages does not keep up with the increase in prices caused by inflation. On the other hand, firms benefit from inflation as their costs (including wages) increase at a slower rate than the prices of the goods or services they sell. Therefore, firms are better off in this scenario.

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  • 24. 

    In the long run, the Phillips curve is a ________ at ________.

    • Horizontal line; 0% inflation

    • Negatively sloped line; the intersection of aggregate demand and short-run aggregate supply

    • Vertical line; the natural rate of unemployment

    • Vertical line; the expected rate of inflation

    Correct Answer
    A. Vertical line; the natural rate of unemployment
    Explanation
    In the long run, the Phillips curve is a vertical line because it represents the idea that there is no trade-off between inflation and unemployment in the long term. The natural rate of unemployment is the rate at which the economy operates at full employment, where any further decrease in unemployment would lead to higher inflation. Therefore, the Phillips curve is vertical at the natural rate of unemployment, indicating that any deviation from this rate will only result in temporary changes in inflation.

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  • 25. 

    Suppose inflation is expected to be 4 percent but is in fact only 3 percent. This:

    • Helps lenders and borrowers.

    • Helps lenders but hurts borrowers.

    • Helps borrowers but hurts lenders.

    • Hurts lenders and borrowers.

    Correct Answer
    A. Helps lenders but hurts borrowers.
    Explanation
    When inflation is lower than expected, lenders benefit because they receive repayment in currency that has more purchasing power than anticipated. However, borrowers are negatively affected as they have to repay their loans with currency that is worth more than what they initially borrowed. This means borrowers have to use more of their income to repay the loan, leading to financial strain. Hence, lower-than-expected inflation helps lenders but hurts borrowers.

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  • 26. 

    The velocity of money is:

    • The average number of months a dollar is held before being spent.

    • The average number of times each dollar is spent each year.

    • Constant

    • Inversly related to output

    Correct Answer
    A. The average number of times each dollar is spent each year.
    Explanation
    The velocity of money refers to the average number of times a dollar is spent within a specific time period, typically a year. It measures how quickly money circulates through the economy and is used as an indicator of economic activity. A higher velocity of money suggests that money is being spent more frequently, indicating a more vibrant economy. Conversely, a lower velocity of money suggests slower economic activity. Therefore, the correct answer is "the average number of times each dollar is spent each year."

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  • 27. 

    According to the quantity theory of money, if the monetary authorities allow the money supply to grow at a rate of 6 percent in an economy that is growing by 2 percent in real terms, then inflation will be:

    • 2 percent

    • 4 percent

    • 6 percent

    • 8 percent

    Correct Answer
    A. 4 percent
    Explanation
    According to the quantity theory of money, inflation is directly related to the growth rate of the money supply. If the money supply grows at a rate of 6 percent and the economy is growing by 2 percent in real terms, the excess money supply will lead to inflation. The inflation rate is calculated by subtracting the real growth rate from the growth rate of the money supply, which in this case would be 6 percent - 2 percent = 4 percent. Therefore, the correct answer is 4 percent.

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  • 28. 

    According to the quantity theory of money, inflation is attributable to increases in:

    • Velocity

    • Real GDP

    • Velocity in excess of increases in real GDP

    • The money supply in excess of increases in real GDP

    Correct Answer
    A. Real GDP
    Explanation
    According to the quantity theory of money, inflation is attributable to increases in real GDP. This theory suggests that when the real GDP of a country increases, there is a corresponding increase in the demand for goods and services. As a result, there is more money circulating in the economy, which can lead to inflationary pressures. Therefore, an increase in real GDP is considered a factor that can contribute to inflation.

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  • 29. 

    Employees at the university have negotiated a 5 percent increase in wages for the next year, based on their inflation expectations. If inflation is actually 4 percent over the next year, which of the following will occur?

    • Unemployment of university employees will fall.

    • Real wages for university employees will rise.

    • Inflation will be 5 percent the following year.

    • The decrease in inflation is expected.

    Correct Answer
    A. Real wages for university employees will rise.
    Explanation
    If inflation is actually 4 percent over the next year, and employees at the university have negotiated a 5 percent increase in wages, it means that their wages will increase more than the rate of inflation. This means that the purchasing power of their wages will increase, resulting in a rise in real wages.

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  • 30. 

    Annual inflation in Zimbabwe was 32 percent in 1998, 383 percent in 2003, and rose to about 100,000 percent in 2009. What is the likely cause of this rapid rise of inflation?

    • The central bank is run by people who do not understand the relationship between money and spending.

    • The government wants to transfer wealth from debtors to creditors.

    • The economy is experiencing balance of payments problems.

    • The government must print money to finance its large deficits because it cannot borrow or raise taxes.

    Correct Answer
    A. The government must print money to finance its large deficits because it cannot borrow or raise taxes.
    Explanation
    The likely cause of the rapid rise of inflation in Zimbabwe is that the government must print money to finance its large deficits because it cannot borrow or raise taxes. This means that the government is relying on printing more money to cover its expenses, leading to an increase in the money supply. As the money supply increases, the value of each unit of currency decreases, causing prices to rise and resulting in inflation.

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  • 31. 

    Which of the following provides the best example of stagflation?

    • Rate of inflation is 3 percent, unemployment is 2 percent.

    • Rate of inflation is 10 percent, unemployment is 2 percent.

    • Rate of inflation is 2 percent, unemployment is 10 percent.

    • Rate of inflation is 10 percent, unemployment is 10 percent.

    Correct Answer
    A. Rate of inflation is 10 percent, unemployment is 10 percent.
    Explanation
    Stagflation refers to a situation where there is a combination of high inflation and high unemployment. In the given options, the only scenario that fits this definition is when the rate of inflation is 10 percent and the unemployment rate is also 10 percent. This indicates a stagnant economy with both high prices and a lack of job opportunities.

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  • 32. 

    • The expected rate of inflation is 3%.

    • The natural rate of unemployment is 3.8%.

    • The current unemployment rate is 5%.

    • The economy is producing at potential GDP.

    • Expected inflation and actual inflation are the same.

    Correct Answer
    A. The expected rate of inflation is 3%.
  • 33. 

    • The short-run Phillips curve will shift to the right.

    • The short-run Phillips curve will shift to the left.

    • The economy will move from C to A.

    • Workers and firms expect inflation to be 1%.

    • The natural rate of unemployment is 6%.

    Correct Answer
    A. The short-run Phillips curve will shift to the left.
  • 34. 

    If actual inflation is correctly expected and built into people's wage and price setting decisions, the Phillips curve:

    • Becomes a horizontal line.

    • Becomes a vertical line.

    • Remains a downward sloping line.

    • Becomes an upward sloping line.

    Correct Answer
    A. Becomes a vertical line.
    Explanation
    The Phillips curve shows the relationship between inflation and unemployment. If actual inflation is correctly expected and incorporated into people's wage and price decisions, it means that individuals and businesses are able to accurately predict future inflation rates. In this case, the Phillips curve becomes a vertical line because there is no trade-off between inflation and unemployment. Regardless of the level of unemployment, inflation will remain constant as it is already accounted for in wage and price setting decisions.

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  • 35. 

    Holding expectations constant, the effect of an increase in the money supply on the Phillips curve in the short run is best shown by a:

    • Shift to the left of the short-run Phillips curve.

    • Shift to the left of the long-run Phillips curve.

    • Movement to the left along the short-run Phillips curve.

    • Movement up the long-run Phillips curve.

    Correct Answer
    A. Movement to the left along the short-run Phillips curve.
    Explanation
    An increase in the money supply in the short run will lead to a decrease in unemployment and an increase in inflation. This is because the increase in money supply stimulates spending and aggregate demand, which in turn leads to higher output and employment levels. As a result, firms may need to hire more workers, reducing unemployment. However, this increase in demand also puts upward pressure on prices, causing inflation. Therefore, the short-run Phillips curve shows a negative relationship between unemployment and inflation. A movement to the left along the curve indicates a decrease in unemployment and an increase in inflation, which is the effect of an increase in the money supply.

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  • 36. 

    If actual inflation is greater than expected inflation, what is the relationship between the actual real wage and the expected real wage?

    • The actual real wage will be lower than the expected real wage

    • The actual real wage will be higher than the expected real wage.

    • The actual real wage will be equal to the expected real wage.

    • The relationship between the actual real wage and the expected real wage cannot be predicted.

    Correct Answer
    A. The actual real wage will be lower than the expected real wage
    Explanation
    When the actual inflation is greater than the expected inflation, it means that prices are rising at a higher rate than initially anticipated. This implies that the purchasing power of money decreases. As a result, the actual real wage, which is the wage adjusted for inflation, will be lower than the expected real wage. This is because the expected real wage is based on the assumption of a lower inflation rate, and when the actual inflation exceeds expectations, the real wage will be eroded to a greater extent than anticipated.

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  • 37. 

    In order to change inflationary expectations in 1979, the Fed's monetary policy under Paul Volcker's leadership resulted in ________ and ________.

    • Disinflation; high unemployment

    • Steep inflation; low unemployment

    • Disinflation; low unemployment

    • Steep inflation; high unemployment

    • Deflation; high unemployment

    Correct Answer
    A. Disinflation; high unemployment
    Explanation
    The correct answer is disinflation; high unemployment. During Paul Volcker's leadership, the Fed implemented a tight monetary policy to combat high inflation. This policy resulted in disinflation, which means a decrease in the rate of inflation. However, it also led to high unemployment as the Fed raised interest rates to reduce inflation, which in turn slowed down economic growth and caused job losses.

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Quiz Review Timeline (Updated): Mar 21, 2023 +

Our quizzes are rigorously reviewed, monitored and continuously updated by our expert board to maintain accuracy, relevance, and timeliness.

  • Current Version
  • Mar 21, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Apr 16, 2011
    Quiz Created by
    M_ackerman

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