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Balancing the Fed Budget

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If the government balanced the budget annually, would that force the government to enact a contractionary fiscal policy when hit with a severe recession? What problems might arise with an annually balanced budget?

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The solution answers what problems might arise with an annually balanced budget.

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If the goal of the government is to balance the budget annually, then government could be forced to enact a contractionary fiscal policy even in the face of a severe recession. If the government has a budget deficit and it needs to balance the budget, it might purse tax increases and reduced ...

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