Suppose an economy has a balanced federal budget, and a favorable supply shock hits the economy. Tax revenues will ________ and expenditures on transfer payments will ________, resulting in a budget ________.

Question

Quizplus · Accepted Answer

A favorable supply shock would increase tax revenues as a result of higher production and consumption. Additionally, transfer payments such as unemployment benefits would decrease as fewer people would be unemployed. This would result in an increase in tax revenues and a decrease in expenditures, leading to a budget surplus. Therefore, D is the correct answer.

Suppose an Economy Has a Balanced Federal Budget, and a Favorable