Multiple choice help (1 Viewer)

[deswa1]

Hey guys,

We got this question in our exam and I think the teacher has the wrong answer. What do you think:

Q. What is the effect of higher petrol prices and interest rates on the government's budget position?

A. Deficit will increase
B. Government revenue will increase
C. Surplus will increase
D. Forgot, but definitely not this.

Thanks heaps

 

[artosis]

Higher petrol prices = cost inflation (higher inflation)
Higher interest rates = less spending to occur within the economy/ may lower inflation

I'd probably guess A.
Pretty confusing question overall.

 

[Bobbo1]

Higher petrol prices = cost inflation (higher inflation)
Higher interest rates = less spending to occur within the economy/ may lower inflation

I'd probably guess A.
Pretty confusing question overall.

yep, higher petrol prices (imports) = deterioration of the CAD

however, increasing the interest rate will increase capital inflow = more investment within australia and income payments must be made out from the CAD

So it has to be A

 

[determine]

I was thinking it might actually be C because when there is higher inflation, typically interest rates will go up and the government will budget for a surplus. This is called a contractionary stance of monetary and fiscal policy. I doubt the government would be looking to increase the deficit, because this would only stimulate economic activity and fuel MORE inflation! But yes, I agree, the question is quite poorly worded!