In the long run,
A) continuing budget surpluses cause interest rates to fall,thereby stimulating investment spending
B) any deviation from a balanced budget will plunge the economy into recession
C) there can be no economic growth unless the government's budget is in surplus
D) there can be no economic growth unless the government's budget is balanced
E) government spending must increase as a fraction of GDP

Question

Quizplus · Accepted Answer

Continuing budget surpluses cause an increase in the supply of loanable funds, leading to a decrease in interest rates. This, in turn, stimulates investment spending, which can lead to economic growth in the long run. However, if the budget surplus is too large, it may lead to a reduction in government spending, which could decrease aggregate demand and lead to a recession. Therefore, maintaining a moderate budget surplus is ideal for promoting long-term economic growth. Choices B, C, and E are incorrect because they suggest an overly simplistic view of the relationship between government budgets and economic growth.

In the Long Run