If public expenditure remains unchanged while tax revenue falls during a recession, the budget balance will most likely:
Correct answer: B. Move towards a larger deficit
- A. Move towards a larger surplus
- B. Move towards a larger deficit
- C. Remain exactly unchanged
- D. Convert automatically into public debt
Explanation
A fall in tax revenue reduces government receipts while expenditure remains constant, so the budget balance worsens and the deficit expands. The resulting deficit may add to public debt if it is financed through borrowing, but the two terms are not identical.
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About Public Finance
Government revenue and expenditure are analysed through taxation, public borrowing, budgets, subsidies, transfers and public debt. The topic explains how fiscal policy affects resource allocation, income distribution, economic stability and growth, while distinguishing direct from indirect taxes, progressive from regressive taxation, and public goods from goods supplied by private markets.
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