Question
In recent times, lifting the so-called debt ceiling --- the legal authority of the U.S. Treasury to issue government debt --- has become more politically
In recent times, lifting the so-called "debt ceiling" --- the legal authority of the U.S. Treasury to issue government debt --- has become more politically contentious than in the past. Many government spending programs are funded by deficits, so if Congress were to fail to raise the debt ceiling then those programs would have to be cut back.
Formally, suppose the economy starts at potential output Y* and that there is a permanent decline in government spending G. Furthermore, assume the zero lower bound is never binding in this question.
Which of the following is true about consumption and investment in the short run?
a. Consumption falls and investment does not change
b. Consumption falls and investment rises
c. Consumption rises and investment falls
d. Consumption falls and investment falls
e. Consumption rises and investment does not change
f. Consumption rises and investment rises
g. None of the above
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