With an unchanged fiscal policy by government, an increase in GDP tends to net tax revenues and thus the budget deficit.

Question

Quizplus · Accepted Answer

An increase in GDP generates more economic activity in the country, leading to higher tax revenues. However, with an unchanged fiscal policy by the government, it would not have any effect on government spending. Thus, an increase in GDP would lead to net tax revenues and a decrease in the budget deficit. Therefore, the correct option is E, which states that an increase in GDP tends to raise tax revenues but lower the budget deficit.

With an Unchanged Fiscal Policy by Government, an Increase in GDP