Explain why increasing the government budget deficit can decrease investment spending
What will be an ideal response?
Saving must equal investment in the economy; that is, S = I. Saving in the economy is equal to the sum of private saving plus public saving or
S = Sprivate + Spublic, and because saving must equal investment we get:
I = Sprivate + Spublic.
Interpreting this expression, the larger saving is in the economy, the larger investment. One way to increase saving is to increase public saving. Public saving is
Spublic = T - G - TR. The budget deficit is defined as the difference between taxes (T) and government spending plus transfers. When the expression for public saving is negative, the government is running a deficit. When this occurs, the total amount of saving in the economy falls. Since the total amount of saving in the economy equals investment, investment falls.
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The induced retirement effect
A. causes a decrease in savings because people retire earlier. B. causes a decrease in savings because people retire later. C. causes an increase in savings because people retire later. D. causes an increase in savings because people retire earlier.
If the natural rate of unemployment in a country is 6% and the unemployment rate in the country is 8%, the cyclical unemployment in the country must be:
A) 8%. B) 6%. C) 14%. D) 2%.
The time lags, which must be either reduced or known with some precision if fiscal policy is to be an effective stabilizing technique, are the lags between
A) the beginning of a cyclical movement and its recognition. B) the decision that compensatory action should be taken and the enactment of tax or expenditure changes. C) the increase or decrease in net government receipts and their final effects on total spending. D) all of the above, because a significant miscalculation with respect to any of these lags could increase aggregate instability.
Compared with other worker complaints, developing proof of discrimination is particularly difficult
Indicate whether the statement is true or false