Suppose that in 2017 government outlays exceeded tax revenues. An increase in government purchases in 2018, with no other budgetary changes, would lead to which of the following from 2017 to 2018 ?ResponsesAn increase in the government budget surplusAn increase in the government budget surplusA decrease in the government budget surplusA decrease in the government budget surplusAn increase in the government budget deficitAn increase in the government budget deficitA decrease in the government budget deficitA decrease in the government budget deficitA decrease in the national debt
Question
Suppose that in 2017 government outlays exceeded tax revenues. An increase in government purchases in 2018, with no other budgetary changes, would lead to which of the following from 2017 to 2018 ?ResponsesAn increase in the government budget surplusAn increase in the government budget surplusA decrease in the government budget surplusA decrease in the government budget surplusAn increase in the government budget deficitAn increase in the government budget deficitA decrease in the government budget deficitA decrease in the government budget deficitA decrease in the national debt
Solution
The correct response would be "An increase in the government budget deficit".
Here's why:
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In 2017, the government outlays (spending) exceeded tax revenues. This means the government was already running a budget deficit (spending more than it was earning).
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In 2018, the government increased its purchases (spending), with no other changes to the budget. This means the government is spending even more.
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Since the government is spending more without increasing its revenues, the budget deficit (the amount by which expenses exceed income) would increase from 2017 to 2018.
Therefore, an increase in government purchases in 2018, with no other budgetary changes, would lead to an increase in the government budget deficit from 2017 to 2018.
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