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:

Avoidant

Referring to a behavioral or psychological strategy of evading or withdrawing from unwanted situations or emotional experiences.

Passionate

Having or expressing strong emotions or beliefs towards something or someone, often characterized by enthusiasm and intense interest.

Equity Theory

A special case of social exchange theory that defines a relationship as equitable when the ratio of inputs to outcomes are seen to be the same by both partners.

Distributive Justice

The fairness of the outcome of a decision.