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Conventional wisdom holds that increasing government [#permalink]
16 Jul 2011, 07:37
63% (02:18) correct
37% (02:12) wrong based on 35 sessions
Conventional wisdom holds that increasing government spending can boost economic growth, especially during a recession. However, sustaining higher levels of government spending over the long term can limit economic growth. When the government spends more money than it collects from taxes, running a budget deficit, it must issue bonds to borrow the money necessary to make up the difference. The private sector, whose bonds compete with those issued by the government, are forced to pay higher interest rates in order to borrow the money necessary for capital expenditures, such as increasing capacity or starting new businesses. Higher interest rates raise the cost of operating a business, thereby restricting the growth of businesses and the economy.
The bolded phrase in the argument above serves which of the following functions?
It shows that the interest rates paid by private sector business to borrow money are greater than that paid by the government.
It is offered as a reason that deficit spending by the government must be limited.
It supports the conclusion that government spending should not be used to increase economic growth during a recession.
It is a hypothesis supported by the observation that a budget deficit forces the government to borrow money by issuing bonds.
It helps show how government budget decisions indirectly affect the growth of businesses.
Can somebody please explain me the reason for eliminating C.
Thanks in advance.
C is not correct, because it limits all governmental spendings. It is not correct. The argument says that the government should limit this procedure, but not forbid it, because otherwise corporates could feel negative effects.