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# Conventional wisdom holds that increasing government

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Manager
Joined: 23 Jan 2011
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Conventional wisdom holds that increasing government [#permalink]

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16 Jul 2011, 07:37
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Difficulty:

65% (hard)

Question Stats:

58% (01:42) correct 42% (02:20) wrong based on 267 sessions

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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.
[Reveal] Spoiler: OA

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Senior Manager
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16 Jul 2011, 09:59
E.

Key is to understand how increase in govt spending indirectly restricts growth of new /existing business.

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Intern
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16 Jul 2011, 17:50
Easy E!

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17 Jul 2011, 23:38
E.
Interesting! This is the first time I have seen a single bold phrase question.

Posted from my mobile device

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Manager
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13 Sep 2011, 08:05
E....

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Manager
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14 Sep 2011, 03:24
E is the asnwer. But it took me 3.5 minutes to answer...
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12 Oct 2011, 11:02
Can somebody please explain me the reason for eliminating C.

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Manager
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24 Oct 2011, 12:22
IndianExpress wrote:
Can somebody please explain me the reason for eliminating C.

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.

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24 Oct 2011, 17:30
+1 E
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25 Oct 2011, 09:46
I picked E...kind of weird answers to choose from.

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Re: Conventional wisdom holds that increasing government [#permalink]

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01 Dec 2014, 05:48
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Re: Conventional wisdom holds that increasing government [#permalink]

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26 May 2017, 09:07
IndianExpress wrote:
Can somebody please explain me the reason for eliminating C.

C should be eliminated because everything written after the bold face is explaining how government spending could indirectly slow private sector growth. I think this is also something you have to know from working in finance and knowing how bond yields affect private sector borrowing and interest rates . So don't worry too much about it .

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Re: Conventional wisdom holds that increasing government   [#permalink] 26 May 2017, 09:07
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