Question

The budget deficit of the government of? Lyria, an open? economy, has persistently remained higher than 6 percent of GDP. Murphy? Smith, a? banker, feels that a high budget deficit is detrimental to economic growth. In his? opinion, there should be a law that makes it mandatory for the government to balance the budget. Dorina? Shaw, a business?analyst, however, disagrees. According to? her, this budget deficit by itself need not be a problem. Governments usually run fiscal deficits even when their economies are at full employment.

Murphy claims that high budget deficit is detrimental to economic growth. Which of the following questions would be most important to answer in order to determine the accuracy of this? claim?

A. Is the budget deficit in Lyria higher than its neighboring? countries?

B. What has been the impact of government borrowing on interest rates in? Lyria?

C. Has the central bank lowered reserve requirements in the recent? past?

D. Is the government revenue from direct taxes higher than that from the indirect? taxes?

E. Is the current income tax structure? progressive?

Answer 1

The impact of government borrowing on interest rates is the essential factor to consider when evaluating if a high budget deficit is detrimental to Lyria's economic growth. Not all budget deficits are harmful, but they must be managed wisely to avoid negative outcomes like inflation and reduced private investment.

Step-by-step explanation:

When considering if a high budget deficit is detrimental to economic growth, one must evaluate several economic factors. The most crucial question among the options presented is: What has been the impact of government borrowing on interest rates in Lyria? This question directly targets one of the potential effects of a high budget deficit. When government borrowing becomes especially large and sustained, it may lead to higher interest rates, which can reduce investment and slow economic growth. However, it is important to consider that not all budget deficits are inherently bad, as they can be used to stimulate an economy during downturns or to invest in long-term growth. A balanced approach is crucial, as deficits also carry risks such as inflation, crowding out private investment, and potential financial crises if not managed properly.