The economy starts out with a balanced federal budget. If the government then implements expansionary ﬁscal policy, then there will be a
A) trade deﬁcit.
B) trade surplus.
C) budget deﬁcit.
D) budget surplus.

Question

Quizplus · Accepted Answer

Expansionary fiscal policy involves increasing government spending and/or decreasing taxes in order to boost economic growth. This will result in an increase in aggregate demand and ultimately lead to an increase in output and employment. However, this increase in government spending will also result in a budget deficit, as the government will be spending more money than it is receiving in revenue. Therefore, the correct answer is C, budget deficit.

The Economy Starts Out with a Balanced Federal Budget