Suppose long-run equilibrium is present and the government budget is in balance.Which of the following would be most likely to occur if the economy falls into a recession?

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Quizplus · Accepted Answer

In a recession, economic activity decreases, which leads to a decline in tax revenues. At the same time, government spending on programs like unemployment benefits and welfare tends to increase. This combination is likely to result in a budget deficit, as the government will be spending more than it is taking in. Therefore, option C is the most likely scenario in this situation. Option A is unlikely to occur as a surplus would require an increase in revenues or decrease in spending, which is unlikely in a recession. Option B is also unlikely as a recession would negatively impact the government's balance sheet. Option D is incorrect as revenues from taxes typically decrease during recessions.

Suppose Long-Run Equilibrium Is Present and the Government Budget Is