Assume that the economy is in a recession and there is a budget deficit. A strict balanced-budget rule that would require the Federal government to balance its budget during a recession would be:
A) Expansionary and worsen the effects of the recession
B) Contractionary and worsen the effects of the recession
C) Contractionary and counter the effects of the recession
D) Expansionary and counter the effects of the recession

Question

Quizplus · Accepted Answer

A strict balanced-budget rule that requires the Federal government to balance its budget during a recession would be contractionary as it would lead to lower government spending and higher taxes, thus worsening the effects of the recession. This is because government spending during a recession can help boost aggregate demand, leading to economic growth, and a strict balanced-budget rule would prevent this from happening.

Assume That the Economy Is in a Recession and There