Question 38

A recession tends to affect the federal budget deficit by rising spending & raising deficit.

During a recession, government spending typically increases due to higher demands for social services and unemployment benefits, while revenue from taxes tends to decrease as economic activity slows. This combination leads to a widening budget deficit.

A) Raising revenue & lowering deficit

This option is incorrect because a recession generally results in lower tax revenues due to decreased economic activity. As a result, the deficit does not lower; rather, it often increases due to rising spending.

B) Rising revenue & raising deficit

This choice is incorrect as well. While the deficit may rise during a recession, revenues do not typically rise; they usually decline due to reduced business profits and individual incomes. Hence, increased revenue does not accompany the rising deficit.

C) Rising spending & lowering deficit

This option is also incorrect. During a recession, government spending does rise significantly, but it does not lead to a lowering of the deficit. Instead, the increased spending combined with lower revenues usually results in a higher deficit.

D) Rising spending & raising deficit

This is the correct option. In a recession, governments often increase spending to stimulate the economy and support those affected, while tax revenues decrease due to lower income and sales. Consequently, the deficit rises as a result of this combination of increased spending and reduced revenue.

Conclusion

The correct answer, rising spending & raising deficit, accurately reflects the economic dynamics during a recession, where government expenditures increase to counteract the downturn, leading to a higher budget deficit. All other options fail because they either misrepresent the relationship between spending and revenue or inaccurately describe the impact of a recession on the federal budget.