One Potential Problem with Using Fiscal Policy to Close Recessionary

question 72

Multiple Choice

One potential problem with using fiscal policy to close recessionary output gaps is that:

• A)sustained government deficits can be harmful to long-run economic growth.
• B)decreased government spending can cause inflationary pressure to build.
• C)reductions in interest rates can reduce savings and, therefore, investment.
• D)it may be offset by automatic stabilizers.

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Definitions:

Discount Rate

The interest rate used to calculate the present value of future cash flows.

Present Values

The today's worth of a future cash amount or cash flow series, determined by a given rate of return.

Discounting

The process of determining the present value of future cash flows by applying a discount rate, reflecting the time value of money.

Compounding

The process in which the value of an investment increases because the earnings on an investment, both capital gains and interest, earn interest as time passes.