Suppose the economy is initially experiencing a short-run recessionary gap. An increase in the size of the budget deficit will
A)increase the size of the recessionary gap.
B)reduce the size of the recessionary gap.
C)lead to an increase in prices with no increase in real GDP.
D)lead to a decrease in prices with an increase in real GDP.

Question

Quizplus · Accepted Answer

An increase in the size of the budget deficit means that the government is spending more than it is receiving in revenue, which can lead to an increase in aggregate demand. This increase in aggregate demand can help to close the recessionary gap and increase real GDP. Therefore, the correct answer is B, which states that an increase in the size of the budget deficit will reduce the size of the recessionary gap.

Suppose the Economy Is Initially Experiencing a Short-Run Recessionary Gap