Suppose the economy is initially experiencing a recessionary gap. A reduction in the size of the budget deficit will cause which of the following in the short run?
A) a reduction in the size of the recessionary gap and increase in real GDP.
B) an increase in the size of the recessionary gap and decrease in real GDP.
C) an increase in inflation and increase in aggregate supply.
D) an inflationary gap.

Question

Quizplus · Accepted Answer

Reducing the size of the budget deficit typically involves decreasing government spending, increasing taxes, or both. In the short run, these actions can decrease aggregate demand, which may lead to a larger recessionary gap and a decrease in real GDP, rather than stimulating economic growth.

Suppose the Economy Is Initially Experiencing a Recessionary Gap