The Impacts of Government Borrowing

twin deficits

deficits that occur when a country is running both a trade and a budget deficit

ricardian equivalence

the theory that rational private households might shift their saving to offset government saving or borrowing

B

What happens when government borrowing becomes large and sustained?
A) It boosts long-term investment by private firms
B) It reduces financial capital available for private investment
C) It automatically lowers trade deficits
D) It eliminates the need for taxes

B

A country experiences “twin deficits” when it has:
A) Two consecutive years of positive GDP growth
B) Both a budget deficit and a trade deficit
C) A surplus and a deficit at the same time
D) A strong exchange rate and rising exports

A

According to the national saving and investment identity, total savings equal:
A) Private savings + public savings (T – G)
B) Government spending + imports
C) Exports – imports
D) Private investment – trade balance

B

What is crowding out in macroeconomics?
A) When foreign investors dominate U.S. financial markets
B) When government borrowing limits private investment
C) When exports exceed imports
D) When private saving drops during inflation

C

Ricardian equivalence suggests that when the government runs a deficit:
A) Private firms increase investment
B) Households reduce spending
C) Households increase savings to prepare for higher future taxes
D) Banks tighten monetary policy

D

Which of the following best describes the effect of a stronger exchange rate caused by government borrowing?
A) It makes exports cheaper
B) It increases the trade surplus
C) It weakens imports
D) It causes a trade deficit by making imports cheaper and exports more expensive

C

What may happen if foreign investors begin to fear a country’s ability to repay debt?
A) Interest rates fall
B) The currency strengthens
C) Capital outflow and recession
D) Investment inflow increases

B

A sustained inflow of foreign capital can become risky if:
A) It is used to fund consumer goods
B) It finances short-term investments in government bonds
C) It is backed by physical gold
D) It’s tied to human capital growth

D

What is the primary role of public investment in physical capital?
A) To increase consumer spending
B) To pay off national debt
C) To reduce imports
D) To improve economic productivity through infrastructure

A

What happens to interest rates if the budget deficit increases?
A) They usually rise between 0.5% and 1.0%
B) They remain unchanged
C) They fall sharply
D) They are set by Congress

C

Which of the following is a public investment in human capital?
A) Tax deductions for homebuyers
B) Corporate tax incentives
C) Government funding for K–12 education
D) Investment in stock exchanges

D

One way fiscal policy can encourage research and development is by:
A) Selling government bonds
B) Cutting interest rates
C) Limiting trade deficits
D) Offering tax incentives for innovation