Explain why the budget deficit and the trade deficit are sometimes referred to as the "twin deficits."
What will be an ideal response?
When the government runs a budget deficit, the government is spending more than it is receiving in net taxes. As the government reduces its saving, the interest rate will rise. With higher interest rates, firms will reduce domestic investment, capital outflows will fall, and capital inflows will rise. As a result, net foreign investment will also fall. Since net foreign investment is equal to net exports, as net foreign investment falls, so will net exports.
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The economy pictured in the figure below has a(n) ________ gap with a short-run equilibrium combination of inflation and output indicated by point ________. 
A. recessionary; B B. recessionary; C C. recessionary; A D. expansionary; A
Draw a production function and illustrate the effects of capital investment and technological improvement on labor productivity.
What will be an ideal response?
Which of the following has a tendency to raise the unemployment rate?
A) implementing a minimum wage above the market wage in an economy B) reducing unemployment insurance in an economy C) offering wages at the market-clearing rate D) reducing labor union membership in an economy
The consumer price index for the current year measures the cost of a standard basket in the ________ year relative to the cost of the same basket in the ________ year.
A. current; current B. base; current C. base; index D. current; base