Critical Thinking Questions


Assume there is no discretionary increase in government spending. Explain how an improving economy affects the budget balance and, in turn, investment and the trade balance.


Explain how decreased domestic investments that occur due to a budget deficit will affect future economic growth.


The U.S. government has shut down a number of times in recent history. Explain how a government shutdown affects the variables in the national investment and savings identity. Could the shutdown affect the government budget deficit?


Explain why the government might prefer to provide incentives to private firms to make investments or conduct R&D, rather than simply spending?


Under what condition does crowding out not inhibit long-run economic growth? Under what condition does crowding out impede long-run economic growth?


What must take place for the government to run deficits without any crowding out?


Explain whether you agree with the premise of the Ricardian equivalence theory that rational people might reason: “Well, a higher budget deficit (surplus) means that I’m just going to owe more (less) taxes in the future to pay off all that government borrowing, so I’ll start saving (spending) now.” Why or why not?


Explain how a shift from a government budget deficit to a budget surplus might affect the exchange rate.


Describe how a plan for reducing the government deficit might affect a college student, a young professional, and a middle-income family.