The Main Reason That the Deficit Grows in a Recession

question 6

Multiple Choice

The main reason that the deficit grows in a recession is that

• A) the government reacts quickly and adjusts taxes to compensate.
• B) monetary policy that targets interest rates causes the costs of borrowing to fall.
• C) the deficit causes the recession, and reducing the deficit cures the recession.
• D) many forms of taxes act as automatic stabilizers.

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Definitions:

Producer Surplus

The mismatch between the price point producers are prepared to accept for a good or service and the actual price they end up receiving.

Monopolist

An individual or firm that is the sole provider of a good or service, possessing significant market power over prices and output.

AC

Average Cost, also referred to as the cost per unit of output, often used interchangeably with Average Total Cost.

Deadweight Loss

The reduction in economic performance that is seen when a good or service fails to achieve the equilibrium in a free market.