Unemployment Increases Government Spending and Reduces Revenue

Steps:

• Unemployment reduces workforce participation, lowering overall economic output.
• Lower output means decreased tax revenues from income and corporate sources.
• Governments often increase spending on unemployment benefits and social programs during downturns.
• This mismatch widens the gap between spending and revenue, causing a budget deficit.

Why B is correct:

• Per fiscal policy principles, unemployment decreases tax collections while boosting automatic stabilizers like welfare payments, directly increasing the government budget deficit.

Why the others are wrong:

• A: Unemployment signals underutilized resources, leading to lower, not higher, output via reduced production.
• C: "Self-esteem budget deficit" is not an economic term and lacks relevance to unemployment effects.
• D: Higher unemployment typically correlates with lower inflation, as per the Phillips curve inverse relationship.

Final answer: B