All governments face a budget constraint: none can spend more than the sum of current government revenues plus the amount that creditors are willing to lend. Why, then, do government budget deficits matter?
What will be an ideal response?
Deficits matter because they are costly, and because they can become unsustainably large. The interest cost of the debt must be paid by spending less on other worthy goods and services, and repayment of principal has the same opportunity cost. Credit extended to the government might have been borrowed and spent in the private sector. While it might be reasonable for a government to borrow to meet crisis needs, it might be reluctant later to raise taxes and/or reduce spending in order to pay down the debt. The next crisis won't wait for repayment of the preceding crisis's debt. The debt makes the economy more vulnerable to crisis and the government less able to respond appropriately. If creditors become reluctant to lend more at a reasonable rate of interest, the government might feel compelled to borrow from the central bank, fueling inflation.
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According to the text, ________ is perhaps the most critical aspect of a country's economic performance
A) the unemployment rate B) growth in GDP C) the inflation rate D) the living standard
In order for Ireland to grow more potatoes, wool production must decrease. This situation is an example of
A) opportunity benefit. B) a tradeoff. C) zero opportunity cost. D) producing at a point that lies beyond the PPF. E) a free lunch.
Market supply is obtained by
A) summing the amount demanded by individual consumers at various prices. B) summing the amount supplied by individual producers at various prices. C) the law of supply. D) observing how the supply curve shifts.
Being the low price seller in the market is
A) the best place to be. B) not necessarily the best place to be. C) expected of large firms as they are subject to economies of scale. D) not as preferred as being the high price seller in the market.