In the long run, an increase in the budget deficit (caused by, for example, an increase in government spending) will:
A) cause a decrease in the level of output.
B) only affect the price level and the composition of output.
C) only affect the price level.
D) not affect the level of output, but does affect the composition of output.
E) cause an increase in the level of output.

Question

Quizplus · Accepted Answer

An increase in the budget deficit can cause an increase in interest rates, which can lead to a decrease in investment and consumption spending, ultimately resulting in a decrease in the level of output in the long run. The increase in government spending may provide a short-term boost to the economy, but the long-term effects of a budget deficit can be detrimental.

In the Long Run, an Increase in the Budget Deficit