Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
A government increases taxes to reduce its deficit, leading to a decrease in consumer spending and a contraction in real GDP.
B
A government borrows money to finance a budget deficit, which is invested in infrastructure projects, resulting in an increase in real GDP.
C
A government cuts public spending to eliminate its budget deficit, resulting in increased employment and higher real GDP.
D
A government maintains a balanced budget, allowing for steady real GDP growth without affecting fiscal policy.
Understanding the Answer
Let's break down why this is correct
Answer
A budget deficit happens when a government spends more money than it collects in revenue. This can lead to increased borrowing, which might help stimulate the economy in the short term. For example, if a government borrows money to build roads, this creates jobs and can boost real GDP because people have more income to spend. However, over time, a persistent budget deficit can lead to higher interest rates and reduced investment in the economy. Thus, while a budget deficit can initially help growth, it can also create challenges for future fiscal policy and economic stability.
Detailed Explanation
When a government borrows money to cover a budget deficit, it can invest in projects like roads and bridges. Other options are incorrect because Some might think raising taxes always helps reduce a deficit; It's a common belief that cutting spending will always boost the economy.
Key Concepts
Budget Deficit
Fiscal Policy
Topic
Calculating Real GDP and Deficits
Difficulty
medium level question
Cognitive Level
understand
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