The government of Burginville currently has a balanced budget. Rampant consumer spending in Burginville has led to a decrease in national savings, which has affected real interest rates in Burginville.

Which action could the government of Burginville take to offset the effect of a decrease in national savings on real interest rates?

Choose 1 answer:
(A) Increase the money supply.

B Decrease the money supply.
(c) Run a budget deficit.
(D) Increase government spending.
(E) Run a budget surplus.

Question

The government of Burginville currently has a balanced budget. Rampant consumer spending in Burginville has led to a decrease in national savings, which has affected real interest rates in Burginville.

Which action could the government of Burginville take to offset the effect of a decrease in national savings on real interest rates?

Choose 1 answer:
(A) Increase the money supply.

B Decrease the money supply.
(c) Run a budget deficit.
(D) Increase government spending.
(E) Run a budget surplus.

Accepted Answer

∻Solution by Steps∻ ‖ step 1 ⋮ Consider the relationship between national savings and real interest rates. In general, when national savings decrease, real interest rates tend to increase due to the lower supply of loanable funds. ‖ ‖ step 2 ⋮ Evaluate the options given in the context of the loanable funds market. Increasing the money supply (A) could potentially lower interest rates, but it may not directly address the issue of decreased national savings. Decreasing the money supply (B) would likely increase interest rates, which is not the desired effect. Running a budget deficit (C) would decrease national savings further, exacerbating the problem. Increasing government spending (D) also tends to decrease national savings, as it often leads to a budget deficit. Running a budget surplus (E) would increase national savings, which could help to lower real interest rates. ‖ ‖ step 3 ⋮ Choose the option that directly addresses the decrease in national savings. Running a budget surplus would increase national savings, which in turn could help to lower the real interest rates. ‖ ∻Answer∻ ***E*** ∻Key Concept∻ ⚹Loanable Funds Market⚹ ∻Explanation∻ ⚹In the loanable funds market, an increase in national savings can lead to a decrease in real interest rates, as it increases the supply of loanable funds. Running a budget surplus is a fiscal action that can increase national savings.⚹◊What is the probability of selecting the correct answer to the multiple-choice question by guessing randomly⍭ Generate me a similar question◊

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