Suppose that an economy is simultaneously experiencing a budget deficit and an inflationary gap.If the government attempts to balance the budget,what will be the effect?
A)Real GDP will increase,and the deficit will increase.
B)Real GDP will increase,and the deficit will decrease.
C)Real GDP will decrease,and the deficit will increase.
D)Real GDP will decrease,and the deficit will decrease.

Question

Quizplus · Accepted Answer

To balance the budget in the presence of a deficit, the government would likely either decrease spending or increase taxes. Both actions would reduce aggregate demand, leading to a decrease in real GDP. Additionally, these actions directly address the budget deficit, leading to its decrease.

Suppose That an Economy Is Simultaneously Experiencing a Budget Deficit