Question

1. Is balancing the budget a contractionary macroeconomic​ policy? A. ​No, balancing the budget is an...

1. Is balancing the budget a contractionary macroeconomic​ policy?

A.

​No, balancing the budget is an expansionary macroeconomic policy because it can lower expected future taxes and increase investment and work effort.

B.

​Yes, balancing the budget is a contractionary macroeconomic policy because it requires a decrease in aggregate demand.

C.

​Yes, balancing the budget is a contractionary macroeconomic policy because it requires a decrease in government spending​ and/or an increase in taxes.

D.

Not necessarily as it does not take into account that balancing the budget may have beneficial future effects that will influence the behavior of households and businesses today.

2. What arguments should be considered in assessing the burden that government debt imposes on future​ generations?

A.

Much of the debt is held by foreigners so that the holders of government bonds are not also taxpayers.

B.

High levels of debt may lead to debt intolerance and increase the risk of default.

C.

Government budget deficits may crowd out private​ investment, lowering the future capital stock with fewer goods and services being produced in the future.

D.

A and C only.

E.

All of the above.

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Answer #1

1. Balancing a budget requires that the government spendings/expenditures, which is weighing higher than its revenue through taxes must be put into balance and the gap must be eliminated. This requires that either the government increases the taxes that it charges or cut down its public spendings. Both actions are contractionary in nature as they reduce the consumption and output level of the economy. Thus, option C.​Yes, balancing the budget is a contractionary macroeconomic policy because it requires a decrease in government spending​ and/or an increase in taxes, is the correct option.

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