If the government runs a primary deficit in year zero of B0, and, in year 1, it decides to stabilize the debt (i.

7. If the government runs a primary deficit in year zero of B0, and, in year 1, it decides to stabilize the debt (i.e., prevent the deficit from rising any further), then in year 1 and beyond, it must run a primary surplus equal to

A. zero.

B. B0.

C. (1+r )B0.

D. r .

E. none of above.

8. In the medium run, a tax increase in a closed economy that causes a reduction in the budget deficit will

A. affect only the price level.

B. not affect the price level but will alter the composition of output.

C. not affect the level of output, but will affect the composition of output.

D. affect both the level and composition of output