Suppose the federal budget is balanced when GDP is at potential GDP.If equilibrium GDP falls below potential
A) this will result in a budget deficit.
B) the budget will remain balanced.
C) transfer payments will decrease automatically.
D) tax revenues will increase automatically.

Question

Quizplus · Accepted Answer

If equilibrium GDP falls below potential, it means that the government's tax revenues will be decreased since they are usually generated mainly from the GDP. This decrease will result in a budget deficit as the government will spend more than it receives. Transfer payments may not necessarily decrease automatically because the government may increase them to stimulate demand and boost the economy.

Suppose the Federal Budget Is Balanced When GDP Is at Potential