Reading 26: Fiscal Policy LOSB习题精选 investment, div, capital, including

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LOS b: Discuss the sources of investment finance and the influence of fiscal policy on capital markets, including the crowding-out effect.

The crowding-out model implies that a:

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

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

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

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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.

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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.

Statement 1

Statement 2

A) Incorrect Correct

B) Incorrect Incorrect

C) Correct Correct

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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.

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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 their statements, Zadora and Smythe are:

Zadora

Smythe

A) Correct Incorrect

B) Incorrect Incorrect

C) Correct Correct

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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.

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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.

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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.

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c

zaestau

c