Multiple Choice
Overall, which of the following measures the overall size and health of an economy?
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1. Introduction to Macroeconomics
Introduction to Economics
Multiple Choice
An increase in government spending with no change in taxes leads to a:
A
lower budget deficit
B
higher budget deficit
C
decrease in government debt
D
decrease in aggregate demand
Verified step by step guidance1
Step 1: Understand the relationship between government spending, taxes, and the budget deficit. The budget deficit occurs when government spending (G) exceeds tax revenue (T), i.e., when \(G > T\).
Step 2: Recognize that an increase in government spending with no change in taxes means \(G\) increases while \(T\) remains constant, so the difference \(G - T\) becomes larger.
Step 3: Since the budget deficit is defined as \(\text{Deficit} = G - T\), an increase in \(G\) without an increase in \(T\) leads to a higher budget deficit.
Step 4: Understand that a higher budget deficit means the government needs to borrow more, which increases government debt rather than decreasing it.
Step 5: Recall that an increase in government spending typically increases aggregate demand, so a decrease in aggregate demand is not the correct outcome.
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