Without targeting the deficit, the following is likely to occur after a ________ shock: Y↓ ⇒ T↓ ⇒ deficit↑.
A) positive aggregate demand
B) negative aggregate demand
C) positive aggregate supply
D) negative aggregate supply

Question

Quizplus · Accepted Answer

A negative aggregate demand shock will lead to a decrease in output (Y↓) and subsequently a decrease in tax revenues (T↓) due to lower economic activity. Without targeting the deficit, this decrease in tax revenues will lead to an increase in the deficit (deficit↑).

Without Targeting the Deficit, the Following Is Likely to Occur