Question

Suppose legislation in canada required annually balanced government budgets. this legislation would:

a. require the bank of canada to expand and contract the money supply according to an annual timetable.
b. deficits but prevent the government from running surpluses.
c. a balanced budget that could turn a minor downturn in the economy into a serious and prolonged recession.
d. increased levels of government spending comma automatically increasing the size of the government debt.
e. require the bank of canada to lower interest rates during periods of inflation.

Answer 1

A requirement for a perpetually balanced budget would worsen economic fluctuations by preventing automatic stabilizers from working.

Step-by-step explanation:

Most economists view the proposals for a perpetually balanced budget with bemusement.

After all, in the short term, economists would expect the budget deficits and surpluses to fluctuate up and down with the economy and the automatic stabilizers.

Economic recessions should automatically lead to larger budget deficits or smaller budget surpluses, while economic booms lead to smaller deficits or larger surpluses.

A requirement that the budget be balanced each and every year would prevent these automatic stabilizers from working and would worsen the severity of economic fluctuations.