Increased government budget deficits cause crowding out if: a. a recession causes businesses to...

Question:

Increased government budget deficits cause crowding out if:

a. a recession causes businesses to lower prices or shut down
b. private investment spending for capital goods is decreased
c. spending on projects funded by the deficit increases the household's spending on goods and services
d. imports are decreased more than exports

Roles of the Government:

The government plays key roles in an economy by implementing policies that promote the stability of economic activities. Some of the policies improve security in business environments. Moreover, the government regulates tax policies to stabilize the money supply when an economy encounters harsh conditions such as a recession or inflation.

Answer and Explanation: 1

Increased government budget deficits cause crowding out if (c) spending on projects funded by the deficit increases the household's spending on goods and services.

An increase in government spending causes a crowding-out effect in an economy because it increases household spending, leading to the decrease of the saving rate. A decreased saving rate leads to instability in the financial market because banks and other financial institutions experience a decrease in their reserves. Eventually, the decrease of reserves affects borrowing activities directly because financial institutions increase their interest rates.

  • a. a recession causes businesses to lower prices or shut down -- This option is incorrect because it explains recession effects such as lowering prices to increase consumption of products enabling businesses to recover from a recession.
  • b. private investment spending for capital goods is decreased -- This statement is incorrect because private investment for capital goods is decreased due to market uncertainties and limited revenues.
  • d. imports are decreased more than exports -- This choice is incorrect because when imports fall more than exports, it indicates that an economy has a trade surplus.

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What is a Budget Deficit? - Definition, Causes & History

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Chapter 11 / Lesson 14
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A budget deficit is individual, organizational, or governmental spending that exceeds the total amount of revenue generated over a defined period of time. Learn all about budget deficits, their causes, and the historical significance of budget deficits in America.


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