In the long run,
A) a larger budget deficit means a larger money supply
B) lower investment spending means slower growth of the standard of living
C) a larger budget deficit means lower consumption spending
D) a larger budget surplus means a smaller capital stock
E) government spending has no effect on the budget deficit or surplus.

Question

Quizplus · Accepted Answer

Lower investment spending means that there will be less capital available for businesses to use to produce goods and services, which will result in slower overall economic growth and a slower growth in the standard of living. A larger budget deficit (choice A) may lead to a larger money supply in the short run, but it does not necessarily mean a larger money supply in the long run. A larger budget deficit may lead to higher consumption spending (choice C), as the government may use deficit spending to increase social welfare programs or transfer payments. However, this may not always be the case. A larger budget surplus (choice D) may lead to a smaller capital stock if the government is using the surplus to pay off debt instead of investing in infrastructure or other capital projects. Choice E is incorrect as government spending can directly impact the budget deficit or surplus.

In the Long Run