The budget deficit of the government of lyria

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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 buisness analyst, however, disagrees. According to her, this budget deficit by itself need not be a problem. Governments usually run fiscal deficits even when their ecnomies are at full employment.

Which of the following, if true, will weaken Dorina's view that the government deficit by itself may not hurt Lyria's economy?

A. Inflation in Lyria has only increased marginally in the last two years.

B. The government of Lyria has traditionally subsidized the production of life-saving drugs to a large extent.

C. The government of Lyria has recently issued new bomds worth $2.5 billion to fund salaries and make transfer payments.

D. Higher spending on infrastructure led to a considerable increase in government expeniture last year.

E. Net exports as a percentage of GDP is expected to decline by 3.2 percent in the current fiscal year.

Reference no: EM131112275

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