If the economy is operating at full employment and runs a federal budget surplus, what might the economy experience in the short-run?

If the economy is operating at full employment and runs a federal budget surplus, what might the economy experience in the short-run?

• A. A recessionary gap
• B. An inflationary gap
• C. Higher unemployment
• D. Increased production

Answer: (A)

When an economy is at full employment, it is producing at its maximum sustainable level, meaning all resources are being utilized efficiently. If the federal budget is running a surplus, it indicates that government revenue exceeds its expenditures. This situation can lead to a reduction in aggregate demand, as government spending often stimulates economic activity. In the short run, the presence of a federal budget surplus might lead to a recessionary gap. This is because if the government is not injecting enough money back into the economy through spending, there can be insufficient demand for goods and services. Without robust aggregate demand, businesses may slow down production, leading to an underutilization of resources and potential increases in unemployment. Thus, while full employment typically indicates a stable economy, a surplus can inadvertently cause a decrease in overall economic activity, resulting in a recessionary gap as businesses and workers respond to softened demand. Overall, the budget surplus and its implications highlight the balance required within fiscal policy to maintain economic stability.

When an economy is at full employment, it is producing at its maximum sustainable level, meaning all resources are being utilized efficiently. If the federal budget is running a surplus, it indicates that government revenue exceeds its expenditures. This situation can lead to a reduction in aggregate demand, as government spending often stimulates economic activity.

In the short run, the presence of a federal budget surplus might lead to a recessionary gap. This is because if the government is not injecting enough money back into the economy through spending, there can be insufficient demand for goods and services. Without robust aggregate demand, businesses may slow down production, leading to an underutilization of resources and potential increases in unemployment.

Thus, while full employment typically indicates a stable economy, a surplus can inadvertently cause a decrease in overall economic activity, resulting in a recessionary gap as businesses and workers respond to softened demand. Overall, the budget surplus and its implications highlight the balance required within fiscal policy to maintain economic stability.