Analysis of U.S. budget deficits in the United States between ...

[mydiamond]

Analysis of U.S. budget deficits in the United States between 1990 and 2000 indicates that which of the following is primarily responsible for the reduction in the budget deficit?
 
  A) decrease in spending
  B) increase in tax revenues
  C) decrease in spending and increase in tax revenues
  D) lower interest rates
  E) increases in tax rates

Question 2

Suppose policy makers pass a budget that results in a reduction in the budget deficit. Also assume that this fiscal policy action results in an increase in the saving rate. To what extent will this increase in the saving rate cause permanent changes in the rate of growth of output per worker? Explain.
 
  What will be an ideal response?

[cuttiesgirl16]

Answer to Question 1

C

Answer to Question 2

A budget that causes a reduction in the budget deficit will cause an increase in the saving rate. Increases in the saving rate will only temporarily affect the growth rates of Y and Y/N. Once the new balanced growth equilibrium is achieved, the growth rates of Y and Y/N will return to their original levels.