In a period of unemployment and falling prices, the government should adopt a

Step 1: Analyze the question The economy has two problems at once: unemployment and falling prices (deflation). This is a recession or depression situation, where total spending (aggregate demand) is too low.

Step 2: Explain the concept Fiscal policy is how the government uses spending and taxation to manage the economy.

• Deflationary gap / recession: The government should expand the economy by increasing spending, cutting taxes, or both. Spending then exceeds revenue, which is a budget deficit.
• Inflation: The government should contract the economy with a surplus budget, where revenue exceeds spending, to reduce excess demand.
• Balanced budget: Spending equals revenue, so it has a neutral effect.
• Zero-based budget: This is a method of preparing a budget in which every expenditure must be justified from scratch. It is not a tool for managing the business cycle.

Step 3: Solve

1. Unemployment and falling prices mean demand is too weak.
2. The government needs to inject money into the economy through public works, subsidies, and lower taxes.
3. This increases incomes, consumption, and output, which creates jobs and pushes prices back up.
4. Spending more than it earns is a budget deficit.

Step 4: Answer The correct option is B. budget deficit.

Step 5: Exam tip Remember the pairing: Deflation/unemployment → Deficit (both start with D), and Inflation → Surplus. Link "deficit" with "deflation" and you won't mix them up.