Sia
Question
Statistics
Posted 10 months ago
Which of the following is the most likely long-run impact of government deficits?
Choose 1 answer:
(A) A higher money multiplier
(B) Higher potential output
(C) More private investment
(D) Less government borrowing
(E) A smaller stock of capital
Sign in to unlock the answer
Answer from Sia
Posted 10 months ago
Solution by Steps
step 1
To understand the long-run impact of government deficits, we refer to the loanable funds market model
step 2
Government deficits increase demand for loanable funds, which leads to an increase in the real interest rate according to the model
step 3
Higher real interest rates discourage private investment, as the cost of borrowing funds increases
step 4
Less private investment can lead to a smaller stock of capital in the long run, as investment is a key component of capital formation
Answer
E
Key Concept
Crowding out effect
Explanation
Government deficits can lead to higher real interest rates, which in turn can crowd out private investment, potentially resulting in a smaller stock of capital in the long run.
Not the question you are looking for? Ask here!
Enter question by text
Enter question by image
Unlock Smarter Learning with AskSia Super!
Join Super, our all-in-one AI solution that can greatly improve your learning efficiency.
30% higher accuracy than GPT-4o
Entire learning journey support
The most student-friendly features
Study Other Question