Suppose the economy is initially experiencing a recessionary gap. An increase in the size of the budget deficit will
A) increase the size of the recessionary gap.
B) reduce the size of the recessionary gap.
C) lead to an increase in prices with no increase in real GDP.
D) lead to a decrease in prices with an increase in real GDP.

Question

Quizplus · Accepted Answer

An increase in the size of the budget deficit means that government spending is increasing, which will increase aggregate demand. This increase in aggregate demand will help to close the recessionary gap by increasing real GDP and reducing unemployment. Therefore, the correct answer is (B) reduce the size of the recessionary gap.

Suppose the Economy Is Initially Experiencing a Recessionary Gap