If there is initially a federal budget deficit, and government purchases and transfer payments both rise:
A)AD increases and the budget deficit increases.
B)AD increases and the budget deficit decreases.
C)AD decreases and the budget deficit increases.
D)AD decreases and the budget deficit decreases.

Question

If there is initially a federal budget deficit, and government purchases and transfer payments both rise:
A)​AD increases and the budget deficit increases.
B)​AD increases and the budget deficit decreases.
C)​AD decreases and the budget deficit increases.
D)​AD decreases and the budget deficit decreases.

Quizplus · Accepted Answer

When government purchases and transfer payments both rise, it leads to an increase in aggregate demand (AD). However, if there is initially a federal budget deficit, it means that government spending is already greater than its revenue. Therefore, an increase in government spending will further worsen the budget deficit. This is because government purchases and transfer payments are part of government spending, which is one of the components of the aggregate demand. Hence, an increase in government spending will increase AD, which, in turn, will increase the budget deficit.

If There Is Initially a Federal Budget Deficit, and Government