What will be the impact on AD and the budget deficit if there is initially a federal budget deficit and government purchases and taxes both rise?
A)AD increases and the budget deficit decreases.
B)There is an indeterminate effect on both AD and the budget deficit.
C)AD decreases and the budget deficit increases.
D)AD increases and the budget deficit increases.

Question

Quizplus · Accepted Answer

The impact on AD and the budget deficit cannot be determined with certainty because it depends on the magnitude of the changes in government purchases and taxes, and their relative sizes to the budget deficit. It's possible that the increase in government purchases can lead to an increase in AD, but the increase in taxes could decrease it. Similarly, the increase in taxes could reduce the budget deficit, but the increase in government purchases could increase it. Therefore, it's not possible to determine the direction of the impact on AD and the budget deficit without more information.

What Will Be the Impact on AD and the Budget