Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506725
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
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Chapter 12, Problem 9CQ
To determine
The effects of budget deficit on capital formation based on Keynesian crowding out and new classical theories.
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Students have asked these similar questions
Suppose that the federal government ran a sizable budget surplus during the next decade. Compared to balancing the budget, how would this surplus affect interest rates, saving, and investment? Compare and contrast the traditional view and the new classical view.
How can the Keynesiam model of deficit budget spending affect the government management?
Criticize the classical theory that higher government spending will necessarily crowd out private spending.
Chapter 12 Solutions
Economics: Private and Public Choice (MindTap Course List)
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- Assume the U.S. government was to decide to increase the budget deficit. This action will most likely cause __________ to increase. A. interest rates B. education level C. unemployment D. taxarrow_forwardRicardian equivalence implies that government budget deficits need not crowd out investment spending. True or Falsearrow_forwardWhat are the advantages and disadvantages of using expansionary monetary policy or expansionary fiscal policy to restore the economy to full employment in the context of a recession's output gap, versus allowing the economy to adjust itself? a.Quicker process; increase in the price level b.No inflationary pressure; increases the government deficit c.No increase in government deficit, slower process d.No inflationary pressure; slower processarrow_forward
- hi, posting this again. will you let me know if these are correct? 18- tax cuts directed at higher income individuals will do more to stimulate the economy than those directed to lower income individuals, in the keynesian model.-true 19- growing federal budget deficits are a problem cased by kenynesian economics- false 20- Keynes advocated using government deficits in times of depression -truearrow_forwardBased on the Ricardian Equivalence, explain the impact of the debt-financed tax cut on public saving, private saving, and national saving.arrow_forwardThe economy is experiencing rapid inflation, pushing above 9%. Which fiscal policy action should the government implement in an attempt to fix this problem? A.) decrease interest rates B.) raise taxes C.) increase spending D.) increase reserve requirementsarrow_forward
- According to the traditional Keynesian analysis, if the government increases spending and pays for all of it by raising current taxes, then a budget deficit will occur. a budget surplus will occur. aggregate demand will decrease. aggregate demand will increase.arrow_forwardWhich of the following statements about government deficits is correct?a. Deficits should occur during recessionary gaps and surpluses during inflationary gapsb. Governments usually have deficits and rarely have surplusesc. Deficits are politically more popular than surplusesd. All of these statements are correcte. Options a and b are both correct but c is notarrow_forwardif the government budget deficit equals $240 billion and the money supply increases by $100 billion, how much must the government borrowarrow_forward
- Explain whether or not you agree with the premise of the Ricardian equivalence theory that rational people might reason: “Well, a higher budget deficit (surplus) means that I’m just going to owe more (less) taxes in the future to pay off all that government borrowing, so I’ll start saving (spending) now.” Why or why not?arrow_forwardHow do (a) Income tax during inflation, (b) Unemployment benefits and other transfer payments during recession, and (c) Credit availability during recessions policies perform as automatic stabilizerarrow_forwardThe current market rate of interest is 10 percent. At that rate of interest, businesses borrow $300 billion per year for investment and consumers borrow $50 billion per year to finance purchases. The government is currently borrowing $150 billion per year to cover its budget deficit.c. How would your conclusion differ if taxpayers fully anticipate future tax increases to offset the increase in the budget deficit?d. Do you think the Ricardian Equivalence is realistic?arrow_forward
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