Suppose the Federal Government Incurs a Deficit Because the Economy

Multiple Choice

Suppose the federal government incurs a deficit because the economy enters a recession. In attempts to balance the budget, Congress enacts a temporary increase in marginal tax rates. This policy will:

A) balance the budget and restore economic stability as individuals become confident about government's ability to shrink the deficit.
B) likely cause aggregate demand to fall, thereby worsening the recession.
C) likely cause aggregate demand to increase, thereby restoring full employment.
D) cause aggregate demand to fall as consumption decreases; however, this decrease will be offset by an increase in investment as interest rates fall in response to the decreased demand for loanable funds.