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:

Short-run Production Function

The short-run production function describes the relationship between input and output levels when at least one input (like capital) is fixed and cannot be changed immediately.

Variable Factor

An input in the production process that can be changed in the short term to influence output.

Fixed Factors

Inputs in the production process that cannot be easily increased or decreased in the short term, such as machinery or land.

Perfect Certainty

A situation in decision making where all outcomes are known and there is no ambiguity or risk.