Which of the following is not true when the economy is fully employed and government bonds are sold to finance greater government spending?
A)This pushes the economy along its production possibilities curve toward more public sector goods.
B)This action results in crowding out.
C)The government is running a structural deficit.
D)The government is running a cyclical deficit.

Question

Quizplus · Accepted Answer

When the economy is fully employed, there is no cyclical unemployment, so a cyclical deficit (which is the result of a decline in tax revenue and increase in transfer payments during a recession) cannot exist. In this situation, if the government sells more bonds to finance increased spending, it will result in crowding out (option B) and a structural deficit (option C), which is a deficit that persists even when the economy is at its potential output level. Option A is true; an increase in government spending will push the economy along its production possibilities curve, but this is not a false statement like option D.

Which of the Following Is Not True When the Economy