dget eficit ercent 14. In which of the following cases does the size of the gove
ID: 1162917 • Letter: D
Question
dget eficit ercent 14. In which of the following cases does the size of the government's debt and the size of the budget deficit real GDP) indicate potential problems for the economy? a. The government's debt is relatively low, but the gov- of ernment is running a large budget deficit as it builds a high-speed rail system to connect the major cities of the nation. b. The government's debt is relatively high due to a recently ended deficit-financed war, but the govern- ment is now running only a small budget deficit. c. The government's debt is relatively low, but the gov- ernment is running a budget deficit to finance the interest payments on the debt. d. The government's debt is relatively high and the gov- ernment is running a budget deficit to finance new infrastructure spending.Explanation / Answer
a. Answer: When the government has relatively little debt however as it is building a high- speed rail system thus running a large budget deficit then this condition should not indicate potential problems for the nation. Like funding a war effort, it is tough, if not impossible, to finance main improvements in country’s infrastructure without borrowing. As long as the budget deficit ends with the building project, it must not create long- term hindrances.
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b. Answer: When the government’s debt is relatively high however the government has reduced its budget deficit, it should not indicate potential problems for the country. But government must be careful that the deficits do not become persistent
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c. Answer: Although government’s debt is relatively low while running a budget deficit to finance the interest payments on the debt, this portends potential concerns for the future. Without any changes, the debt of government will grow over time and with it the size of the government’s budget deficit due to raise in the interest payments. If GDP growth does not cope with growth in the government’s debt, the debt–GDP ratio will increase
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d. Answer: When the government’s debt is relatively high and with building of a high-speed rail system it will increase further thus portends potential concerns for the future
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