Without targeting the deficit, which of the following is likely to occur after a negative aggregate demand shock?
A) Y↓ ⇒ T↓ ⇒ deficit↑ ⇒ G↓ ⇒ AD↑ ⇒ Y↑
B) Y↓ ⇒ T↓ ⇒ deficit↑
C) Y↓ ⇒ T↓ ⇒ deficit↑ ⇒ G↓ ⇒ AD↓ ⇒ Y↓
D) Y↓ ⇒ T↓ ⇒ deficit↓

Question

Quizplus · Accepted Answer

Following a negative aggregate demand shock, if the deficit is not specifically targeted for reduction, a decrease in output (Y↓) would lead to a decrease in tax revenues (T↓), which would naturally lead to an increase in the budget deficit (deficit↑), assuming government spending is not immediately adjusted in response.

Without Targeting the Deficit, Which of the Following Is Likely