In the short-run framework, budget deficits should:
A. never be run since they slow economic growth over the long run
B. never be run since they crowd out investment in the short run
C. be run on a temporary basis whenever the economy is below potential output
D. be run on a permanent basis since they can always be financed by printing money
C. be run on a temporary basis whenever the economy is below potential output.
deficits reduce investment over the long run but may be desirable in the short run if they help stabilize the economy when it falls below potential output
In the long-run framework, budget surpluses:
A. should be run whenever output dips below potential output.
B. should never be run since they crowd out investment in the short run.
C. are better than budget deficits over the long run because ...view middle of the document...
B. borrowing from its central bank.
C. selling bonds.
D. printing money.
A. buying bonds
Government bond purchases involve lending by the government, not borrowing.
Deficits and surpluses are best viewed as:
A. comprehensive measures of government's budget.
B. a summary measure of a nation's fiscal policy.
C. a summary measure of the financial health of the economy.
D. a summary measure of a nation's monetary policy.
B. a summary measure of a nation's fiscal policy
Deficits and surpluses give the difference between a government's tax receipts and its outlays and hence are a summary measure of the government's budget.
In the long-run framework, deficits reduce:
B. government consumption.
Deficits reduce investment over the long run because they reduce savings but may be desirable in the short run if the economy falls below potential output.
a cyclical deficit is the portion of the deficit that exists when:
A. the economy is at potential income.
B. the economy is beneath potential income.
C. inflation is not fully anticipated.
D. inflation is fully anticipated.
B. the economy is beneath potential income
The cyclical deficit represents that portion of the deficit that exists because income is below its potential.
If income falls below its potential and the income tax rate is reduced, this will:
A. raise both the cyclical and structural deficits.
B. raise the cyclical deficit but reduce the structural deficit.
C. reduce the cyclical deficit but raise the structural deficit.
D. reduce both the cyclical and structural deficits.
A. raise both the cyclical and structural deficits
As income falls below its potential, tax revenues decline and transfer payments increase, causing an increase in the cyclical deficit. If the income tax rate is cut, tax revenues will fall even when the economy is at pote