Impact of budget deficits 5. Impact of budget deficitsThe following graph shows the demand for loanable funds and the supply of loanable funds in the United States. At the current equilibrium, thegovernment is experiencing a balanced budget. Assume that the automobile industry is on the verge of bankruptcy and the U.S. government decidesto implement a several-billion-dollar bailout plan without a rise in taxes, causing a budget deficit.Show the effect of the budget deficit on the market for loanable funds by shifting the demand (D) curve, the supply (S) curve, or both.LOANABLE FUNDSIN TEREST RATE Based on this model, the budget deficit leads toin the level of investment andin the interest rate.Which of the following arguments might an advocate of a balanced budget make in support of his position? Check all that apply.O An individual's share of the government debt represents only a small portion of his or her lifetime earnings.O A decrease in spending today, such as funding cuts in education, may hurt future generations more.O Budget deficits crowd out private investment.O Budget deficits place a burden on future taxpayers.Proponents of a balanced budget argue that the government's budget deficit cannot grow forever, but critics believe that this is not necessarily thecase. They argue that what matters is the size of the debt relative to the nation's income.For example, suppose that real output in the United States grovws at approximately 3%. If the inflation rate is 2% per year, this means that nominalincome must be growing at a rate of% per year. Because nominal income grows over time, the nation's ability to pay back the national debtalso rises. Therefore, as long as the nation's income growsv than the government debt, the level of debt can continue to increase vwithoutharming the economy. In this case, the nominal government debt can rise by% each year without increasing the debt-to-income ratio.

As the government decided to announce a bailout plan without raising the taxes, this is going to…

5. Impact of budget deficits The following graph shovs the demand for loanable funds and the supply of loanable funds in the United States. At the current equilibrium, the government is experiencing a balanced budget. Assume that the automobile industry is on the verge of bankruptcy and the U.S. government decides to implement a several-billion-dollar bailout plan without a rise in taxes, causing a budget deficit. Show the effect of the budget deficit on the market for loanable funds by shifting the demand (D) curve, the supply (S) curve, or both.

5. Impact of budget deficits The following graph shovs the demand for loanable funds and the supply of loanable funds in the United States. At the current equilibrium, the government is experiencing a balanced budget. Assume that the automobile industry is on the verge of bankruptcy and the U.S. government decides to implement a several-billion-dollar bailout plan without a rise in taxes, causing a budget deficit. Show the effect of the budget deficit on the market for loanable funds by shifting the demand (D) curve, the supply (S) curve, or both.

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter18: Savings,investment And The Financial System

Section: Chapter Questions

Problem 9PA

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Impact of budget deficits

Based on this model, the budget deficit leads to
in the level of investment and
in the interest rate.
Which of the following arguments might an advocate of a balanced budget make in support of his position? Check all that apply.
O An individual's share of the government debt represents only a small portion of his or her lifetime earnings.
O A decrease in spending today, such as funding cuts in education, may hurt future generations more.
O Budget deficits crowd out private investment.
O Budget deficits place a burden on future taxpayers.
Proponents of a balanced budget argue that the government's budget deficit cannot grow forever, but critics believe that this is not necessarily the
case. They argue that what matters is the size of the debt relative to the nation's income.
For example, suppose that real output in the United States grovws at approximately 3%. If the inflation rate is 2% per year, this means that nominal
income must be growing at a rate of
% per year. Because nominal income grows over time, the nation's ability to pay back the national debt
also rises. Therefore, as long as the nation's income grows
v than the government debt, the level of debt can continue to increase vwithout
harming the economy. In this case, the nominal government debt can rise by
% each year without increasing the debt-to-income ratio.

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