35- Crowding out occurs when A) government borrowing to finance a budget deficit

Question

35- Crowding out occurs when A) government borrowing to finance a budget deficit makes interest rates rise. B) sovermment borrowing to finance a budget deficit makes interest rates fall. C) a government budget surplus makes interest rates rise D) a government budget surplus makes interest rates fall. Use the following to answer question 36: Seenario: Money Supply Changes II Charlotte withdraws $8,000 from her Assume that the reserve requirement is 20% and that banksdo not hold excess revere. 36. (Scenario: Money Supply Changes II) According to the scenario Money Supply Changes II, as a result of the withdrawal, required reserves: A) decrease by $1,600. B) decrease by $6,400. C) decrease by $8,000. D) don't change. Use the following to answer question 37: Figure: Change in the Demand for U.S. Dollars Euros per Supply of U.S. dollars U.S. dollar x, 02 Demand for U.S. dollars D1 Quantity of U.S. dollars 37, Refer to the infomation in the figure Change in the Demand for U.S. Dollars. The change from DI to D2 will occur, all other things being equal, if A) interest rates rise in Europe. B) interest rates rise in the United States. C) interest rates in the United States and Europe both rise by the same amount. D) U.S. consumers buy m ore goods and services from Europe.

Explanation / Answer

35) Crowding out occurs when Government borrowing to finance its deficit budget causes the interest rates to rise. The correct answer is "A".

36) The reserve will reduce by $1,600. As the reserve requirement is 20%, banks have to keep 20% of $8000 as reserves. After Charlotte withdraws $8000 its 20% i.e. $1,600 bank doesn't need to keep as a reserve. So the bank reserve will be decreased by $1,600.

37) As per the graph given above the US dollar has appreciated i.e. it takes more Euros to buy one Dollar. This can be caused because of a rise in interest rates in the United States. A rise in interest rates in The US will cause an outflow of the Euro to invest in the US where the returns are high. It will cause the demand for the dollar to increase and depreciate Euro against it.

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