What will be the impact on AD and the budget surplus if there is initially a federal budget surplus and government purchases rise while taxes fall?
A)AD decreases and the budget surplus increases.
B)AD increases and the budget surplus decreases.
C)AD decreases and the budget surplus decreases.
D)AD increases and the budget surplus increases.

Question

Quizplus · Accepted Answer

An increase in government purchases and a decrease in taxes both lead to an increase in aggregate demand (AD). However, these actions also reduce the budget surplus, as government spending increases and tax revenues decrease.

What Will Be the Impact on AD and the Budget