Chapter 23: Problem 2

The federal government finances a budget by a. taxing businesses and households. b. selling Treasury securities. c. printing more money. d. reducing its purchases of goods and services.

Short Answer

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The federal government finances a budget by a. taxing businesses and households, b. selling Treasury securities, and c. printing more money. Option d, reducing its purchases of goods and services, is not a method of financing the budget but rather a way to decrease government spending.

Step by step solution

Option a: Taxing businesses and households

The government collects taxes from businesses and households in the form of income tax, payroll tax, sales tax, corporate tax, and more. These tax revenues are used to finance the budget and support government spending on various programs such as education, healthcare, and defense. So, this option is correct.

Option b: Selling Treasury securities

The government can sell Treasury securities, such as bonds, notes, and bills, to investors in order to raise funds to finance the budget. This allows the government to borrow money from the public and private sector, with the promise of repaying the borrowed amount (the principal) along with interest in the future. This is another valid method of financing the budget, making this option correct as well.

Option c: Printing more money

In some situations, the government may direct the central bank (such as the Federal Reserve in the United States) to print more currency in order to fund its expenditures. This is generally not a preferred method of financing the budget, as it can lead to inflation and destabilize the economy. However, it is technically a method to finance the budget, so this option is correct.

Option d: Reducing its purchases of goods and services

Reducing government purchases of goods and services is not a method of financing the budget but rather a way to decrease government spending. By reducing spending, the government might be able to balance its budget or reduce the deficit; however, this option does not provide funding for any expenses or cover the current budget. So, this option is incorrect. In conclusion, options a, b, and c are the correct ways in which the federal government finances a budget.

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