The main reason that the deficit grows in a recession is that
A) the government reacts quickly and adjusts taxes to compensate.
B) monetary policy that targets interest rates causes the costs of borrowing to fall.
C) the deficit causes the recession, and reducing the deficit cures the recession.
D) many forms of taxes act as automatic stabilizers.

Question

Quizplus · Accepted Answer

Many forms of taxes act as automatic stabilizers, meaning that when the economy is in a recession and incomes are falling, tax revenues automatically decrease, and transfer payments like unemployment benefits automatically increase. This leads to a larger deficit as government spending increases and tax revenue decreases. Additionally, the government may increase its spending in order to stimulate the economy, further contributing to the deficit.

The Main Reason That the Deficit Grows in a Recession