If there is initially a federal budget deficit, and taxes fall while transfer payments rise:
A)there is an indeterminate effect on both AD and the budget deficit.
B)AD increases and the budget deficit increases.
C)AD increases and the budget deficit decreases.
D)AD decreases and the budget deficit increases.

Question

If there is initially a federal budget deficit, and taxes fall while transfer payments rise:
A)​there is an indeterminate effect on both AD and the budget deficit.
B)​AD increases and the budget deficit increases.
C)​AD increases and the budget deficit decreases.
D)​AD decreases and the budget deficit increases.

Quizplus · Accepted Answer

When taxes fall, individuals and businesses have more disposable income, which can increase consumption and investment, leading to an increase in aggregate demand (AD). Rising transfer payments (such as unemployment benefits or social security) also increase disposable income for recipients, further boosting AD. Both of these actions, however, mean the government is collecting less in taxes while spending more, which would increase the budget deficit.

If There Is Initially a Federal Budget Deficit, and Taxes