Suppose Congress Decides to Reduce the Budget Deficit by Cutting

question 38

Essay

Suppose Congress decides to reduce the budget deficit by cutting government spending. 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 in words what happens to equilibrium income as a result of the cut in government spending and the time horizon appropriate for this analysis.

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Definitions:

Scientific Theory

Hypothesis that has not been falsified after many years of rigorous testing, and is useful for making predictions about a wide range of phenomena.

Population Over Generations

Describes the changes in the size, genetic composition, or characteristics of a population across multiple generations.

Decomposers

Organisms, such as bacteria, fungi, and certain insects, that break down dead or decaying organisms, turning organic matter into simpler substances.

Dead Consumers

Organisms that have consumed other organisms during their lifetime and have since died, playing a role in nutrient cycling as they decompose.