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:

Poison Pill

A strategy employed by companies to thwart hostile takeovers by making their stock less attractive to potential acquirers.