The government of Tatooine had a balanced budget last year. However, an unanticipated recession triggered by the wanton destruction of Jabba's Palace leads to a decrease in tax revenues, even though government spending and transfer payments did not change.

What happens to the budget balance and national debt in Tatooine as a result of the decrease in tax revenues?

Choose 1 answer:

A There is a budget surplus; national debt will decrease
(B) There is a budget surplus; no impact on national debt
(c) There is a budget deficit; the debt will increase
(D) There is a budget deficit; no impact on national debt
(E) There is a balanced budget; national debt will increase

Question

The government of Tatooine had a balanced budget last year. However, an unanticipated recession triggered by the wanton destruction of Jabba's Palace leads to a decrease in tax revenues, even though government spending and transfer payments did not change.

What happens to the budget balance and national debt in Tatooine as a result of the decrease in tax revenues?

Choose 1 answer:

A There is a budget surplus; national debt will decrease
(B) There is a budget surplus; no impact on national debt
(c) There is a budget deficit; the debt will increase
(D) There is a budget deficit; no impact on national debt
(E) There is a balanced budget; national debt will increase

Accepted Answer

∻Solution by Steps∻ ‖ step 1 ⋮ Consider the initial condition of a balanced budget, which means that tax revenues were equal to government spending and transfer payments: $ ext{Tax Revenues} = ext{Government Spending} + ext{Transfer Payments} $. ‖ ‖ step 2 ⋮ Recognize that a decrease in tax revenues while keeping government spending and transfer payments constant will result in a budget where expenditures exceed revenues: $ ext{New Tax Revenues} < ext{Government Spending} + ext{Transfer Payments} $. ‖ ‖ step 3 ⋮ Infer that the imbalance created by decreased tax revenues will lead to a budget deficit, as the government will have to borrow money to cover the shortfall, thus increasing the national debt: $ ext{Budget Deficit} ightarrow ext{Increase in National Debt} $. ‖ ∻Answer∻ ***C*** ∻Key Concept∻ ⚹Budget Deficit and National Debt⚹ ∻Explanation∻ ⚹A decrease in tax revenues with unchanged government spending leads to a budget deficit, which in turn increases the national debt.⚹◊What statistical methods can be used to analyze the impact of the decrease in tax revenues on Tatooine's budget balance and national debt?⍭ Generate me a similar question◊

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