Under a balanced budget policy, a sharp decline in GDP will cause
A)no serious budget changes.
B)a tax cut or an increase in expenditures.
C)a tax increase or expenditure cut.
D)tax receipts to exceed government expenditures.

Question

Quizplus · Accepted Answer

A sharp decline in GDP will cause a decrease in tax revenue for the government. Under a balanced budget policy, the government must balance its budget, so a tax increase or expenditure cut is necessary to compensate for the decrease in revenue and maintain a balanced budget. A tax cut or increase in expenditures would only further widen the budget deficit. Tax receipts exceeding government expenditures would imply a budget surplus, which is not likely during a sharp decline in GDP.

Under a Balanced Budget Policy, a Sharp Decline in GDP