What will be the impact on AD and budget deficit if there is initially a federal budget deficit,and government purchases and transfer payments both rise?
A)AD increases and the budget deficit decreases.
B)AD decreases and the budget deficit decreases.
C)AD decreases and the budget deficit increases.
D)AD increases and the budget deficit increases.

Question

Quizplus · Accepted Answer

When the government purchases and transfer payments rise, it leads to an increase in aggregate demand (AD) as consumers have more money to spend. However, if there is already a federal budget deficit, the increase in government spending will lead to a further increase in the deficit. Therefore, both AD and the budget deficit will increase.

What Will Be the Impact on AD and Budget Deficit