Suppose Congress decides to reduce the budget deficit by cutting government spending. a. Use the Keynesian-cross model to illustrate graphically the impact of a reduction in government purchases on the equilibrium level of income. Be sure to label: i) the axes; ii) the curves; iii) the initial equilibrium values; iv) the direction the curve shifts; and v) the terminal equilibrium values. b. Explain what happens to equilibrium income as a result of the cut in government spending.
Suppose Congress decides to reduce the budget deficit by cutting government spending. a. Use the Keynesian-cross model to illustrate graphically the impact of a reduction in government purchases on the equilibrium level of income. Be sure to label: i) the axes; ii) the curves; iii) the initial equilibrium values; iv) the direction the curve shifts; and v) the terminal equilibrium values. b. Explain what happens to equilibrium income as a result of the cut in government spending.
Brief Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter18: Six Debates Over Macroeconomic Policy
Section: Chapter Questions
Problem 2CQQ
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Suppose Congress decides to reduce the budget deficit by cutting government spending.
a. Use the Keynesian-cross model to illustrate graphically the impact of a reduction in
government purchases on the equilibrium level of income. Be sure to label: i) the axes;
ii) the curves; iii) the initial equilibrium values; iv) the direction the curve shifts; and
v) the terminal equilibrium values.
b. Explain what happens to equilibrium income as a result of the cut in government
spending.
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