If the federal budget goes from a budget deficit in Year 1 to a budget surplus in Year 2, does it follow that the federal government acted to raise taxes or cut government spending in Year 2?
What will be an ideal response?
No, the economy could have been in an expansion in Year 2 with GDP growing faster than anticipated. The faster growth in GDP would raise tax revenues and decrease government spending on transfer payments, decreasing the budget deficit (in this case, moving it to a budget surplus).
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Which of the following accurately describes an effect of hurricane Katrina on GDP?
A) GDP would increase reflecting the decrease in production that occurred during the storm and the productive capacity lost in the storm. B) GDP would increase well-being. C) GDP would increase reflecting the costs of cleanup. D) GDP would decrease reflecting the costs of cleanup.
If a consumer borrows at an interest rate greater than the interest rate at which he or she can lend, then
A) banks cannot make a profit. B) the budget constraint has a kink at the endowment point. C) the consumer must be a lender. D) this makes no difference for consumer behavior.