Federal budget deficits grow during recessions because

Question

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During a recession, unemployment tends to increase, which leads to a decrease in tax revenues (as people are earning less income and paying less in taxes) and an increase in transfer payments (such as unemployment benefits). Therefore, both tax revenues decrease and transfer payments increase, resulting in a larger budget deficit. Option A and B are incorrect as they suggest both tax revenues and transfer payments move in the same direction, which is not the case. Option D is incorrect as it suggests tax revenues will increase during a recession, which is unlikely. Option E is also incorrect as it assumes no change in transfer payments during a recession.

Federal Budget Deficits Grow During Recessions Because