Assume that the government is currently balancing the national budget so that outlays equal tax revenue.Then the economy slips into recession,and the government decides to increase government spending by $50 billion.The government must pay for this by borrowing; it must sell $50 billion worth of Treasury bonds.As a result:

Question

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When the government increases its spending, it must sell bonds to finance the expenditure. This results in an increase in the federal deficit, which means that outlays exceed tax revenue. The deficit will be equal to the amount of borrowing, which is $50 billion in this case. Therefore, the federal budget will be in deficit by at least $50 billion.

Assume That the Government Is Currently Balancing the National Budget