Reading 27: Fiscal Policy - LOS b ～ Q1-4

答案和详解如下：

1.Total investment is one of the components of a country’s GDP. Which of the following is least likely to be considered a source of funds for investment?

A)   National savings.

B)   Foreign borrowing.

C)   Household expenditures.

D)   Government savings.

The correct answer was C)

Total investment is one of the major components of GDP (the others are consumption, government spending, and net exports). Investment is defined as expenditures allocated to fixed assets and inventory. The sources of funds for investment are national savings, foreign borrowing, and government savings.

2.The federal government seeks ways to increase the total investment component of GDP. In response to the government’s objective, economist Sean Zadora recommends that the federal government lower taxes on interest earned on savings accounts. Zadora’s colleague, Timothy Smythe, recommends that the federal government reduce its budget deficit.

Regarding the statements made by Zadora and Smythe:

A)                   Correct                                Incorrect

B)                   Correct                                 Correct

C)                   Incorrect                              Incorrect

D)                   Incorrect                               Correct

The correct answer was B)

Income tax reductions on interest income cause savings and investments to increase. Lower taxes on savings make saving more attractive. Therefore, Zadora is correct. Smythe is also correct. Budget deficits (expenditures exceed tax revenues) equate to negative savings by the government, detracting from total investment. A reduction in the government deficit, as recommended by Smythe, indicates that the government’s negative savings is lessening, thereby contributing positively to total investment. Also, as the government reduces its deficit, it will likely lead to lower interest rates and to a smaller “crowding out effect” of private investment.

3.Are the following two statements about fiscal policy correct?

Statement 1: The crowding out effect reduces the multiplier effect of expansionary fiscal policy but does not affect economic growth.

Statement 2: A generational imbalance exists if the present value of government benefits to the current generation is not fully paid for by taxes on the current generation.

A)                   Correct                                Correct

B)                   Correct                               Incorrect

C)                   Incorrect                              Correct

D)                   Incorrect                             Incorrect

The correct answer was C)

Statement 1 is incorrect. By decreasing the available quantity of savings and increasing the real interest rate, fiscal crowding out results in less capital investment by private firms and therefore reduces potential GDP. Statement 2 is an accurate description of the generational effects of fiscal policy.

4.The crowding-out model implies that a:

A)   budget deficit will increase the real interest rate and thereby retard private investment.

B)   budget surplus will retard aggregate demand and trigger an economic downturn.

C)   budget surplus will be a highly effective weapon against inflation.

D)   budget deficit will stimulate aggregate demand and trigger a multiplier effect which will lead to inflation.

The correct answer was A)

Increased budget deficits will increase the demand for loanable funds and lead to higher interest rates and thus lower private investment. Crowding-out implies that an increase in government spending will choke off private investment and reduce the intended impact of fiscal policy changes on aggregate demand.