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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A) extinguishing, reduces B) extinguishing, increases C) neutral, leaves unchanged D) accommodative, reduces E) accommodative, increases
According to liquidity preference theory, an increase in the price level would ________
A) increase the demand for real money balances B) decrease the supply of real money balances C) decrease the real interest rate D) all of the above E) none of the above
In the classical view, flexible wage rates would assure
A) low inflation. B) high rates of unemployment. C) high secular inflation rates. D) full employment.
Use the marginal principle to explain why government mandated safety features in automobiles during the 1960s and 1970s resulted in an increase in collisions between automobiles and bicycles
What will be an ideal response?