Which of the Following Is a Problem for Fiscal Policy

question 16

Multiple Choice

Which of the following is a problem for fiscal policy in a currency union?

• A) The central bank controls interest rates on long-term bonds issued by the governments of the member countries of the currency union.
• B) Governments of the member countries of the currency union may run large budget deficits and so crowd out private investment.
• C) Governments of the member countries of the currency union may run large budget deficits and so impose costs on other countries by pushing up interest rates on the bonds these countries' governments issue.
• D) It is difficult to raise enough tax revenue to pay for the operation of the currency union.
• E) Governments of the member countries of the currency union may run large budget deficits and so force taxes to be increased across all countries of the currency union.

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Definitions:

Geographic Boundaries

Demarcated physical limits of geographical areas, which can include country borders, state lines, or natural barriers.

Production Factors

The inputs used in the process of producing goods or services, typically classified as land, labor, and capital.

Globalized Market

A large market created by combining separate national markets.

European Union

A political and economic union of 27 European countries that are located primarily in Europe, aiming to ensure free movement of people, goods, services, and capital.