Will austerity work? Practice Questions

Complete the government budget constraint. Government Spending = _________________ +_______________. *

a. tax revenue, borrowing

b. investment, net exports

c. consumption, tax revenue

Which of the following is an issue with raising taxes? *

a. higher taxes damage productive activity

b. higher taxes depress aggregate demand

c. both a. and b.

Which of the following is an issue with cuts in government spending? *

a. increases in aggregate demand

b. civil unrest

c. a disproportionate shift in investment from short-term to long-term investment

Suppose a nation cuts government spending or increases taxes. This reduces GDP in the short run.This in turn decreases tax revenue which leads to further tax increases or further cuts in governmentspending. This may lead to a ________________. *

a. downward spiral

b. liquidity trap

c. both a. and b.

According to economic literature, the “best adjustments” for a struggling economy are: *

a. falling exchange rates and depressed consumption

b. spending cuts and decent fundamentals

c. tax hikes and rising exchange rates

In order for austerity measures to work, ________________ must fall. *

a. wages

b. consumption

c. both a. and b.

Practice Questions

Will austerity work? Practice Questions

Background

Further analysis of the problems

Underlying theory

Updates and extensions

Exam