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Principles of Macroeconomics 2e

Critical Thinking Questions

Principles of Macroeconomics 2eCritical Thinking Questions


Assume there is no discretionary increase in government spending. Explain how an improving economy will affect the budget balance and, in turn, investment and the trade balance.


Explain how decreased domestic investments that occur due to a budget deficit will affect future economic growth.


The U.S. government has shut down a number of times in recent history. Explain how a government shutdown will affect the variables in the national investment and savings identity. Could the shutdown affect the government budget deficit?


Explain how a shift from a government budget deficit to a budget surplus might affect the exchange rate.


Describe how a plan for reducing the government deficit might affect a college student, a young professional, and a middle-income family.


Explain whether or not you agree with the premise of the Ricardian equivalence theory that rational people might reason: “Well, a higher budget deficit (surplus) means that I’m just going to owe more (less) taxes in the future to pay off all that government borrowing, so I’ll start saving (spending) now.” Why or why not?


Explain why the government might prefer to provide incentives to private firms to do investment or research and development, rather than simply doing the spending itself?


Under what condition would crowding out not inhibit long-run economic growth? Under what condition would crowding out impede long-run economic growth?


What must take place for the government to run deficits without any crowding out?

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