If a government has a budget deficit, it must Group of answer choices: decrease taxes. decrease...

If a government has a budget deficit, it must

Group of answer choices:

decrease taxes.

decrease its expenditures.

increase taxes.

borrow in the loanable funds market.

Expert Solution

- If a government has a budget deficit, it must never decrease the tax rates because the taxes are form of earning to the government and it would not decrease its earnings at the time of deficit when it is already running out of profits because of its exceeding expenses. Therefore, this is not the correct option.

Group of correct choices:

- As we know that a budget deficit occurs when the government spends more than what it has earned. So, when a government has a budget deficit, it will definitely focus on decreasing its expenditure in order to reduce its deficit.

- It would be the best option for the government to increase the taxes to cope up with the deficit. A budget deficit occurs when the government’s revenue is less than the amount it has spent. And, taxes are a source of income to the government so it can increase the taxes at the time of deficit.

- We know that the one who is running in a loss is the one who borrows. Here, if a government is facing a budget deficit, it would definitely borrow in the loanable funds market in order to reduce the deficit and to help the economy grow. It is when the government has a budget surplus, a situation in which it has the capacity to spend because of its greater profits, it becomes the lender in the loanable funds market.

Rahul Sunny answered 2 years ago

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