If an economy initially has a balanced budget, but its transfer payments increase, what happens to the budget balance and national debt?

[A] There will be a budget surplus; national debt will decrease

[B] There will be a budget deficit; the national debt will increase

[C] There will be a budget deficit; no impact on national debt

[D] There will be a budget surplus, no impact on national debt

Answer: B

Notes:

If an economy with a balanced budget experiences an increase in transfer payments, it will not experience a budget surplus.
A budget deficit occurs when tax revenues are less than government spending and transfer payments. If transfer payments increase, but tax revenue does not, then the budget will move to a deficit. As a result of a budget deficit, the government will add to its national debt.
Transfer payment are for redistribution of income and wealth by means of the government making a payment, without goods or services being received in return. Examples of transfer payments include welfare, financial aid, social security, and government subsidies for certain businesses.

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