An economy experiences a rapid, unanticipated economic expansion, leading to labor shortages and rising inflationary pressures. If robust automatic stabilisers are functioning effectively in this economy, which of the following is the most likely outcome?
The cyclical budget deficit will automatically widen, further accelerating economic growth.
Aggregate demand will expand by more than it otherwise would have done because of rising tax revenues.
Aggregate demand will expand by less than it otherwise would have done, helping to dampen inflationary pressures.
The structural budget deficit will automatically shrink to offset any changes in aggregate supply.
