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Ch 19

Terms in this set (24)

Crowding out
when government borrowing soaks up available financial capital and leaves less for private investment in physical capital
Ricardian equivalence
the theory that rational private households might shift their saving to offset government saving or borrowing
Based on the national saving and investment identity, what are the three ways the macroeconomy might react to greater government budget deficits?
reduced investment, a wider trade deficit, and increased savings
How would you expect larger budget deficits to affect private-sector investment in physical capital? Why?
larger budget deficits increase the demand for capital which drives up interest rates and makes private sector investment more expensive
What are some of the ways that fiscal policy might encourage economic growth?
fiscal policy can increase government spending on goods and services, which boosts aggregate demand and leads to increased economic output
What are some fiscal policies for improving society's level of human capital?
spending more money on teachers and other educational resources and reorganizing the education system to provide greater incentives for success
What are some fiscal policies for improving the technologies that the economy will have to draw upon in the future?
grants to universities, funding for NASA and other types of scientific research can improve technologies over time
What is the theory of Ricardian equivalence?
rational private households might shift their saving to offset government saving or borrowing
Under what conditions will a larger budget deficit cause a trade deficit?
a larger budget deficit will cause an increase in the trade deficit when private savings do not offset the spending and private investment is not fully crowded out
From a macroeconomic point of view, which of the following is a source of demand for financial capital?

(a) savings by households and firms
(b) foreign financial investment
(c) domestic household private savings
(d) government borrowing
government borrowing
If David Ricardo's theory of "Ricardian equivalence" holds true, then any change in government budget deficits or budget surpluses would be completely offset by which of the following?

(a) a change in currency exchange rates
(b) a dependence in inflows of capital
(c) a corresponding change in private saving
(d) a sustained pattern of trade imbalances
a corresponding change in private saving
The U.S. economy has two main sources for financial capital: ____________ and ____________.
private savings from U.S. household and firms; inflows of foreign financial investment
If an economy has a government budget deficit of 600, private savings of 2,000, and investment of 800, what is the balance of trade in this economy?
surplus of 600
A stronger ____________ makes it more difficult for exporters to sell their goods abroad while making imports cheaper, thereby increasing a trade deficit.
exchange rate
If a country currently has a government budget surplus and a trade deficit, the national savings and investment identity is written as:
S + (M - X) + (T - G) = I
____________ can set the stage for international financial investors first to send their funds to a country and cause an appreciation of its exchange rate and then to pull their funds out and cause a depreciation of the exchange rate and a financial crisis as well.
twin deficits
Which of the following is likely to result from a prolonged period of government budget deficits?

(a) appreciating or strengthening exchange rate
(b) substantial inflows of foreign financial capital
(c) high inflation
(a) appreciating or strengthening exchange rate
If a country has a trade surplus and a government budget deficit, the national savings and investment identity is written as:
S = I + (G - T) + (X - M)
If an economy has a government budget surplus of 400, private savings of 1,200, and investment of 1,600, what will the balance of trade in this economy equal?
0
If a country has a government budget deficit and a trade deficit, the national savings and investment identity is written as:
S + (M - X) = I - (G - T)
If a government's budget deficits are increasing aggregate demand when the economy is already producing near potential GDP, causing a threat of inflationary increase in price levels, then the central bank may react with:
a contractionary monetary policy
When government borrowing soaks up available financial capital and leaves less for private investment in physical capital, the result is known as:
crowding out
A ____________ is one economic mechanism by which government borrowing can crowd out private investment.
higher interest rate
In the national savings and investment identity framework, inflow of savings from abroad is, by definition, equal to:
the trade deficit
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