Imagine that a government starts out with the budget surplus.If in the next period the government temporarily runs a budget deficit,what would you expect to happen to aggregate demand?
A) AD would increase.
B) AD would lie on the Solow growth rate.
C) AD would stay the same.
D) AD would decrease.

Question

Quizplus · Accepted Answer

When a government moves from a budget surplus to running a budget deficit, it typically means that the government is increasing its spending or decreasing taxes, which injects more money into the economy. This increase in government spending or decrease in taxes raises aggregate demand because more money is available for consumers and businesses to spend.

Imagine That a Government Starts Out with the Budget Surplus