Question

1. What was the main financial problem that the government of Greece faced in 2009?

Select one:

a. It had a large budget deficit, but most of its creditors were unwilling to make loans to Greece or charged extremely high interest rates to compensate them for the risk of loss.

b. It had a large budget deficit, but the parliament refused to raise transfer payments to reduce the deficit.

c. It had a large budget surplus, but the president vetoed attempts to use the surplus to give tax refunds to the citizens.

d. It had a large budget surplus that it needed to invest, but it was unable to find investments that offered a high rate of return.

2. Policy makers use a contractionary fiscal policy when they want to close:

Select one:

a. a recessionary gap.

b. any kind of output gap.

c. an open economy.

d. an inflationary gap.

3. If the government spends an extra $5 billion on goods and services, GDP will:

Select one:

a. increase by less than $5 billion.

b. go up by $5 billion.

c. remain unchanged.

d. increase by more than $5 billion.

Answer 1

1. (A) It had a large budget deficit, but most of its creditors were unwilling to make loans to Greece or charged extremely high rates to compensate them for the risk of loss

Reason: In 2009 Greece experienced a very large budget deficit which led to the financial crisis it faced in 2009. Also, the country faced very high interest rates on borrowing which made matters worse.

2. (D) An inflationary gap

Reason: In case of inflationary gap, actual output exceeds potential output. This means it is important to use a contractionary fiscal policy to reduce output and close the inflationary gap.