A government budget proposing to spend more than its expected revenue in a year will create_______?

Step 1: Analyze the question A budget where planned spending is greater than expected revenue is called a deficit budget. We need to find what this creates in the economy.

Step 2: Explain the concept A deficit budget is an expansionary fiscal policy. The government injects more money into the economy than it collects in taxes. This is usually financed by borrowing or by printing money. The effects are:

• Higher aggregate demand
• More government projects and spending
• More output and jobs

Governments use deficit budgeting to fight depression, recession and unemployment. The opposite, a surplus budget (revenue greater than spending), is used to combat inflation.

Step 3: Evaluate each option

• A. Opportunity for combating inflation: Incorrect. Combating inflation needs a surplus budget, which reduces money in circulation. A deficit tends to add to inflationary pressure.
• B. Depression in the economy: Incorrect. A deficit is a remedy for depression, not a cause of it.
• C. Shortage in money supply: Incorrect. A deficit increases money supply, so it does not cause a shortage.
• D. Opportunity for full employment: Correct. The extra government spending raises demand and output, which creates jobs and moves the economy toward full employment.

Step 4: Answer The correct option is D. Opportunity for full employment.

Tip: Remember it this way:

• Deficit = Develop jobs (expansion, fights unemployment and depression)
• Surplus = Subdue prices (contraction, fights inflation)