Answer to Question #249794 in Macroeconomics for Question 3

Question

Considering automatic stabilizer, which of the following is likely to increase the South African government’s existing budget deficit?

1. A decrease in real GDP.
2. A lower unemployment rate.
3. A decrease in the price level.

I, II and III.

II only

II and III only

I only

Answer 1

1 only.

A decrease in real GDP.

This results in an increased budget deficit because a reduction in real GDP means that the rate of economic growth has fallen and tax revenues are low, and this tends to raise the spending on social safety net programs, since many people will need this program when the economy is not doing well.