3

Set 2: Central Ideas (Advanced)

Explanation

Answer: D

PASSAGE

The following text describes Modern Monetary Theory (MMT). Modern Monetary Theory (MMT) challenges conventional economic views on government spending. MMT argues that a government which issues its own fiat currency can never run out of money and can pay for goods, services, and financial assets without a need to collect taxes or borrow beforehand. In this view, constraints on spending are not financial but rather resource-based; inflation occurs not because of the deficit itself, but when the demand generated by spending outstrips the real productive capacity of the economy.

According to MMT, what is the true constraint on government spending?

A. The amount of tax revenue collected
B. The willingness of foreign nations to lend money
C. The real productive capacity of the economy (which drives inflation)
D. The amount of gold held in the national reserve✓ Correct

Detailed Explanation

Choice C is correct. The text states: 'constraints on spending are not financial but rather resource-based' and links inflation to 'real productive capacity.'

Key Evidence:

• "constraints on spending are... resource-based"

• "real productive capacity of the economy"

Why others are wrong: A (Opposite (Explicitly challenged by MMT)), B (Inaccurate), D (Inaccurate (Fiat currency is not backed by gold)).

← PreviousNext →