ECO 231 Ch. 31 Quiz

Twin deficits refer to the combination of government budget deficit and trade deficit. The relationship between the 2 types of deficit is

An increase in the government budget deficit can lead to a greater trade deficit, but not always.

Which of the following statements accurately describes the crowding out effect?

For a given country, assuming no change in trade balances and private savings, an increase in government borrowing would lead to a reduction in private investment.

A large government budget deficit may trigger ___ because ___

Inflation; it may shift aggregate demand far enough to the right

Assume that the government is implementing an expansionary fiscal policy and as a result has increased borrowing. At the same time, the central bank is carrying out a contractionary monetary policy. As a result, we can expect:

Interest rates would rise substantially and private investments would be significantly reduced.

Improvements in productivity leads to economic growth thanks to ...

Public and private investment in human capital, technology and physical capital.

If the Ricardian equivalence held true, its graphical representation would show:

The curve representing government borrowing and the one representing public savings would increase or decrease together.

Assume the country of Ballear is running a greater budget deficit and is forced to borrow large additional amounts of money. What is likely to happen to the exchange rate of its currency (the Dinor)?

The demand for Dinors will increase, and as a result the exchange rate for the Dinor will rise.

Based on the Ricardian equivalence, increased government borrowing by $1 will cause:

The public to increase savings by $1