the greatest expansionary impact of a budget deficit will occur when:
a-government borrows the money from the general public
b-economy is operating in the intermediate range of its aggregate supply curve
c-marginal propensity to save for the economy is high
d-gov. finances the deficit by obtaining new money
To determine the correct answer to this question, we need to understand the concept of a budget deficit and its impact on the economy.
A budget deficit occurs when a government's spending exceeds its revenue in a given time period. The impact of a budget deficit on the economy depends on how it is financed and the state of the economy.
Now let's evaluate each option to find the correct answer:
a) If the government borrows the money from the general public to finance the budget deficit, it may have some expansionary impact. When the government borrows from the public, it absorbs some of the savings and directs them into productive investments. However, it does not necessarily provide the greatest expansionary impact.
b) The intermediate range of the aggregate supply curve refers to a situation where the economy is operating at near-full capacity. In this range, an increase in government spending may have limited expansionary impact as the economy is already producing close to its maximum potential. Therefore, this option is not likely to be the correct answer.
c) The marginal propensity to save (MPS) refers to the fraction of additional income that individuals save rather than spend. If the MPS is high, it means that individuals tend to save a significant portion of their income rather than spend it. In this case, a budget deficit may have a limited expansionary impact as the public is more inclined to save than spend. Therefore, this option is not likely to be the correct answer either.
d) If the government finances the budget deficit by obtaining new money, it is known as deficit financing or monetary expansion. This is achieved by the central bank creating new money and injecting it into the economy. This option is likely to have the greatest expansionary impact as the increased money supply stimulates economic activity. It can lead to increased consumer spending, investment, and overall economic growth.
Therefore, the correct answer is d) the government finances the deficit by obtaining new money.