An increase in the federal budget deficit
A)only occurs when there is a deficit in the balance of trade
B)creates deflation
C)decreases aggregate demand
D)decreases aggregate quantity demanded along a stationary aggregate demand curve
E)raises the equilibrium level of output and employment

Question

Quizplus · Accepted Answer

An increase in the federal budget deficit leads to an increase in government spending, which raises the overall level of demand in the economy. This results in an increase in output and employment, as firms produce more to meet the higher demand. Therefore, option E is correct. The other options are incorrect as an increase in the federal budget deficit does not result in a deficit in the balance of trade (Option A), does not create deflation (Option B), does not decrease aggregate demand (Option C), and does not decrease aggregate quantity demanded along a stationary aggregate demand curve (Option D).

An Increase in the Federal Budget Deficit