A Government Reduces Its Budget Deficit,but at the Same Time

question 16

Multiple Choice

A government reduces its budget deficit,but at the same time people become concerned that the outlook for future government expenditures and revenues increase the chance it will default.Which of the following is correct?

• A)The reduced budget deficit will raise interest rates in general.The increased risk of default will raise interest rates on government bonds.
• B)The reduced budget deficit will raise interest rates in general.The increased risk of default will reduce interest rates on government bonds.
• C)The reduced budget deficit will reduce interest rates in general.The increased risk of default will raise interest rates on government bonds.
• D)The reduced budget deficit will reduce interest rates in general.The increased risk of default will reduce interest rates on government bonds.

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Definitions:

Marginal Tax Rate

The rate at which an additional dollar of income is taxed, representing the percentage of tax applied to your last dollar of income.

Tax Burden

The total amount of tax paid by an individual, a household, or an organization relative to their income or profits.

Social Security Benefits

Payments made to eligible individuals by the government, including retirement, disability, and survivor benefits.

Progressive Tax

Places greater burden on those with best ability to pay and little or no burden on the poor (for example, federal personal income tax).