Assume that the economy is in a recession and there is a budget deﬁcit. A strict balanced-budget rule that would require the Federal government to balance its budget during a recession would be
A) expansionary and worsen the effects of the recession.
B) contractionary and worsen the effects of the recession.
C) contractionary and counter the effects of the recession.
D) expansionary and counter the effects of the recession.

Question

Quizplus · Accepted Answer

A strict balanced-budget rule during a recession would require the government to decrease spending or increase taxes, which would be contractionary and worsen the effects of the recession. It would reduce aggregate demand and potentially lead to a deeper and more prolonged recession.

Assume That the Economy Is in a Recession and There