Question : 91) The proposition that increases in government budget deficits in : 1384510

91) The proposition that increases in government budget deficits in an open economy tend to crowd out net exports relies on the idea that

A) government demand for labour tends to create manpower shortages in export industries.

B) much government expenditure is typically directed towards imported goods and services.

C) the resulting increase in interest rates attracts an inflow of financial capital that causes the currency to appreciate.

D) the rise in private-sector wealth associated with the rising stock of bonds leads to a fall in the saving rate and therefore a current account deficit.

E) there is downward pressure on interest rates that causes the currency to depreciate.

92) Refer to Figure 32-3. Suppose the government implements an expansionary fiscal policy which increases the budget deficit. The initial effect of this policy is the opening of a(n) ________ gap, and a new short-run equilibrium with a price level of ________ and real GDP of ________.

A) recessionary; P1; Y2

B) inflationary; P1; Y*

C) inflationary; P2; Y*

D) inflationary; P1; Y1

E) recessionary; P0; Y*

93) Refer to Figure 32-3. Suppose the government in this closed economy implements an expansionary fiscal policy, which increases the budget deficit. When the economy reaches its new long-run equilibrium, how has the composition of national income changed?

A) net exports have fallen

B) investment has fallen

C) consumption has increased

D) net exports have risen

E) the composition of national income at Y* is unchanged

94) Refer to Figure 32-3. Suppose the government implements an expansionary fiscal policy, which increases the budget deficit. The economy’s adjustment process returns real GDP to Y* in the long run. Since real GDP is not affected in the long run, how are future generations likely to be harmed by this government policy?

A) Investment in public infrastructure has been crowded out, which will harm future generations.

B) Private investment has been crowded out, which may lead to a lower future growth rate of potential GDP.

C) The inflationary gap is harmful to the economy and reduces real GDP in the future.

D) The budget deficit causes an appreciation in the domestic currency which reduces the income of future generations.

E) Future generations are definitely not harmed by this policy.

95) Until the onset of the most recent recession in 2009, Canadian governments (federal and provincial) had been running budget surpluses for about 10 years. Economic theory suggests that, other things being equal, these budget surpluses will lead to

A) a rise in national saving, a fall in interest rates and a “crowding in” of investment and net exports.

B) a fall in national saving, a rise in interest rates and a “crowding out” of investment and net exports.

C) an appreciation of the domestic currency and a fall in Canada’s net exports.

D) a depreciation of the domestic currency and a fall in Canada’s net exports.

E) a rise in national saving, a rise in interest rates and a “crowding out” of investment and net exports.

96) Many economists argue that the long-term burden of government debt will include:

1) a redistribution of resources away from future generations toward the current generation;

2) reduced investment and as a result a lower long-run rate of economic growth;

3) a burden on future generations who will have to pay interest to the owners of government bonds.

A) 1 and 2

B) 2 and 3

C) 1, 2, and 3

D) 2 only

E) 3 only

97) There is a long-term burden of government debt in a closed economy when

A) foreign owners of Canadian debt demand repayment.

B) it is no longer possible to find individuals in the private sector willing to finance the debt.

C) the burden of the debt is being borne by the current generation rather than future generations.

D) present consumption and government expenditure are not reduced because of future crowding-out.

E) the stock of physical productive capital is reduced because of crowding out.

98) It can be argued that a government budget deficit, rather than being a burden for future generations, may provide net benefits to future generations. This view is correct if the current budget deficit is used to

A) pay transfers such as welfare and old age pensions in the present period.

B) finance projects that deliver long-term benefits to society.

C) invest in the purchasing of goods not available in the local economy.

D) ensure that all interest paid goes to residents rather than foreigners.

E) pay subsidies to Canadian firms to offset rising energy costs.

99) The concept of capital budgeting refers to the idea that

A) government budgets should be designed to be balanced, while fully recognizing that changing economic circumstances may prevent such balance.

B) if the debt-to-GDP ratio rises to unacceptable levels, the central bank can monetize portions of the government debt.

C) counter-cyclical fiscal policy is included in the government budget.

D) the government would classify all expenditures as either consumption (benefiting current generations) or investment (benefiting future generations).

E) the government would direct a fixed percentage of its budget toward investment expenditure that would benefit future generations.

100) Decreasing government expenditures in order to reduce the government’s budget deficit can involve certain costs. An example of such a cost could be

A) larger school facilities to accommodate a growing population.

B) longer queues for essential government services such as health-care services.

C) encouraging future generations to be more self-sufficient and less reliant on government to provide for them.

D) a lower portion of taxes being used to pay interest.

E) improving the flexibility to practice counter-cyclical fiscal policy.