Suppose the budget deficit falls from one year to the next, but there has been no change in the government's fiscal policy. The change in the budget deficit can be explained by

Question

Quizplus · Accepted Answer

If there has been no change in the government's fiscal policy, then a reduction in the budget deficit must be due to an increase in tax revenue or a decrease in government spending, which can be caused by an increase in real GDP. As real GDP increases, tax revenue increases and government spending on income-support programs like unemployment insurance and welfare decreases because fewer people need them.

Suppose the Budget Deficit Falls from One Year to the Next