Question

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: Group of answer choices

Answer 1

Answer: b. be in deficit by at least $50 billion.

Step-by-step explanation:

The Government budget had been balanced but it will now have to spend $50 billion more than it is making. This will mean that Government expenditure will rise by $50 billion over the tax revenue which will lead to a deficit of the same amount.

These are bonds however meaning that the Government would have to pay interest on the $50 billion. This will push the deficit owed to over $50 billion meaning that the Government would be in deficit of at least $50 billion.