Question

10. which of the following statements is (are) correct?
(x) When the government runs a budget deficit, investment is lower than it would be otherwise because interest rates are higher than they would be otherwise.
(y) A reduction in the budget deficit would cause a shortage of loanable funds at the original interest rate, and as a result, interest rates would rise.
(z) When the government runs a budget deficit, national saving is higher than it would be otherwise.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (x) only

11. which of the following statements is (are) correct?
(x) Crowding out occurs if government borrowing leads to a fall in investment
(y) An increase in the budget surplus would lead to increased borrowing by the government.
(z) In a closed economy, an increase in borrowing by the government would lead to reduced borrowing by businesses and households because of an increase in the cost of borrowing.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (x) only

12. which of the following sets of government policies is the most economic-growth oriented?
A. lower taxes on interest income, reduce investment tax credits, and raise the budget deficit.
B. lower taxes on interest income, provide investment tax credits, and lower the budget deficit
C. lower taxes on interest income, provide investment tax credits, and raise the budget deficit.
D. raise taxes on interest income, provide investment tax credits, and lower the budget deficit.
E. raise taxes on interest income, provide investment tax credits, and raise the budget deficit.

Answer 1

10. (E)

Reason when government runs budget deficit then government borrows from market , it leads to fall in the availability of more funds in the market which is only available at the higher interest rate. opposite to it when reduction in budget deficit leads to increase in loanable fund with less interest rate. when government run budget defitcit it leads to fall in the national saving so. only option (X) is suitable

11. C. (x) and (z) only

Reason  Crowding out occurs if government borrowing leads to a fall in investment because when government borrowing occurs due to crowding out then there will be less amount of investment in the financial market. simultaneously an increase in borrowing by the government would lead to reduced borrowing by businesses and households because of an increase in the cost of borrowing. because interest rate will increase due to less amount for investment will be available in the market.

12. (B)

lower taxes on the returns to saving provide investment tax credits and lower the deficit reason less tax on interest income leads more spending leads to more investment activity leads to more money in the hands of government to finance their expenditure. leads to increase budget surplus.