The significance of the government
the balanced reciprocal flow of government spending versus its receipts
from taxes and bond sales is not widely understood. This
quiz of 20 questions will test your understanding.
Drag the mouse pointer over the
see the answer.
1. The Treasury deposits its
receipts from taxes
and bond sales in commercial bank accounts where they count as reserves
of the banking system. [True*]
Since government spending cannot be synchronized with
taxes and bond sales, the so-called Treasury Tax and Loan accounts in
banks provide a buffer stock needed in managing the Treasury's general
2. Except for petty cash, all
is paid out of its account at the Fed. [True*]
The Treasury targets a constant balance of 5 billion
dollars in its
account at the Fed by transfers from its TT&L accounts. The
is to minimize variations in banking system reserves and thereby
the Fed's control of the Fed funds rate.
3. The amount of money in the
bank accounts increases when the government runs a budget
The Treasury has no use for and does not accumulate
funds in excess
of its near term payment obligations. A budget surplus is
used to reduce the national debt held by the public.
4. As the economy grows, Treasury
taxes and bond sales must exceed spending in order to build up the
in its accounts. [False]
On average, the Treasury must spend at least as much as
in taxes and bond sales in order to avoid a drain on the monetary base,
which would eventually create a liquidity crisis in the banking system.
5. Interest paid on the debt by
the Treasury reduces
the funds it has available for other spending. [False]
The Treasury has unlimited spending power in its own
All of its spending, including interest payments, is normally covered
tax revenues and the sale of bonds to the public. It can also
directly from the Fed, although that is rarely done.
6. Most of the funds from the sale
of new Treasury
securities are used to pay for the redemption of maturing
The principal reason for new security sales by the
Treasury is to roll
over existing debt. Acquiring funds for deficit spending normally
accounts for a small fraction of those sales.
7. The government will eventually
if it continues to deficit spend indefinitely. [False]
Only if the government borrowed heavily in a foreign
it has no need to do, would it potentially have any difficulty in
8. The sale of Treasury securities
by the government
crowds out borrowing within the private sector. [False]
Funds the Treasury borrows are promptly returned to the
through government spending, and thus become available for further
There is no net drain on the private sector, only a redistribution of
9. All government spending
assets within the private sector. [True*]
There is no correlation between those who receive
directly or indirectly, and those who pay taxes and/or buy Treasury
All government spending necessarily redistributes financial assets
the private sector.
10. The Treasury sells its
securities in an auction
process and pays a market rate of interest. [True*]
Most of the Treasury securities are sold at auction to a
group of securities
dealers who are required to create a market in those securities, in
acting as underwriters. The public can purchase Treasury
at the price determined in the auction.
11. The net financial wealth of
the private sector
increases when the government deficit spends. [True*]
Deficit spending adds to the supply of Treasury
securities which, together
with money issued by the Fed, increases the net financial wealth of the
private sector. By contrast, every dollar of bank credit is
by a dollar of debt, and thus nets to zero.
12. Paying down the national debt
additional money for the private sector. [False]
Paying down the national debt means the net redemption
of Treasury securities.
It has no direct effect on the money supply. It simply transfers
funds from tax payers to holders of the debt, who to some extent are
13. The national debt must some
day be retired.
The Treasury must redeem individual securities as they
mature, but the
debt can be rolled over indefinitely. Treasury securities are now
an important savings vehicle for the public.
14. Government deficits typically
economic recessions. [True*]
During recessions, the national income decreases due to
and reduced spending in the private sector, which results in lower tax
revenues and larger budget deficits.
15. Government deficits usually
rates to rise. [False]
Short-term interest rates are controlled by the
rates are mainly a function of short-term rates and inflationary
There is no significant correlation between government deficits and
16. Unlike the federal government,
and local governments must balance their budgets annually. [False]
Their operational budgets must be balanced annually, but
such as building roads and schools are normally funded through
borrowing whose costs remain on the books as continuing debt.
17. Funds from Social Security
taxes, not needed
for benefit payments, are invested in non-negotiable Treasury bonds
by the Trust Fund. [True*]
Excess FICA tax revenues are used by the Social Security
to buy special purpose Treasury bonds. The proceeds automatically
become a part of the general fund of the Treasury.
18. The bonds owned by the Trust
a debt of the government to those who paid FICA taxes. [False]
The government owns the assets and earnings of the Trust
Fund, and can
raise or lower future Trust Fund collections and payments, or change
purpose for which the collections are used, by changing existing
The bonds are IOUs of the government to itself, basically a meaningless
19. If the Trust Fund were
privatized and invested
in the stock market, the government budget deficit would automatically
be reduced. [False]
The end of FICA tax revenues to the Treasury due to
the Trust Fund would have to be offset one way or another. The
would have to spend less, tax more, or borrow more.
20. Measured in terms of present
or taxing are equivalent in cost to the public as a whole. [True*]
The present value of the future tax required to retire
today is, to first order, the same as if the money were acquired today