In the Long Run, an Increase in the Budget Deficit

question 29

Multiple Choice

In the long run, an increase in the budget deficit (caused by, for example, an increase in government spending) will:

• A) cause a decrease in the level of output.
• B) only affect the price level and the composition of output.
• C) only affect the price level.
• D) not affect the level of output, but does affect the composition of output.
• E) cause an increase in the level of output.

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Definitions:

Bankruptcy

A legal process through which individuals or businesses unable to meet their financial obligations can seek relief from some or all of their debts.

Competition

The rivalry among businesses to sell their goods and services to consumers, driving innovation and keeping prices low.

Great Depression

A severe worldwide economic downturn that lasted throughout the 1930s, marked by widespread unemployment and poverty.

Monetary Contraction

A decrease in the money supply in an economy, often implemented by central banks to control inflation.