Which of the following best describes the result of a government moving from a budget deficit to a budget surplus?

Choose 1 answer:
(A) Aggregate demand increases
(B) The money supply increases
(C) Government borrowing increases
(D) Real interest rates decrease
(E) Bond prices decrease

Question

Which of the following best describes the result of a government moving from a budget deficit to a budget surplus?

Choose 1 answer:
(A) Aggregate demand increases
(B) The money supply increases
(C) Government borrowing increases
(D) Real interest rates decrease
(E) Bond prices decrease

Accepted Answer

∻Solution by Steps∻ ‖ step 1 ⋮ To understand the economic consequences of a government moving from a budget deficit to a budget surplus, we need to consider the relationship between government borrowing and the budget balance. ‖ ‖ step 2 ⋮ A budget deficit occurs when government spending exceeds government revenue, which often leads to increased government borrowing to finance the deficit. ‖ ‖ step 3 ⋮ Conversely, a budget surplus occurs when government revenue exceeds government spending, which typically results in reduced government borrowing or even paying down existing debt. ‖ ‖ step 4 ⋮ Therefore, if a government transitions from a budget deficit to a budget surplus, it implies that the government's need for borrowing decreases, not increases. ‖ ‖ step 5 ⋮ We can also consider the impact on interest rates. When the government borrows less, the supply of loanable funds increases, which can lead to a decrease in real interest rates, all else being equal. ‖ ‖ step 6 ⋮ Based on the above steps, we can determine which answer choice correctly describes the result of a government moving from a budget deficit to a budget surplus. ‖ ∻Answer∻ ***D*** ∻Key Concept∻ ⚹Government borrowing and budget balance⚹ ∻Explanation∻ ⚹When a government moves from a budget deficit to a budget surplus, it reduces its borrowing needs, which can lead to a decrease in real interest rates. Option C is incorrect because government borrowing decreases, not increases, when transitioning to a budget surplus.⚹◊What is the probability that a random selection would choose "Government borrowing increases" as the answer to the multiple-choice question presented?⍭ Generate me a similar question◊

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