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a. Suppose a government moves to reduce a budget deficit. Using the long-run model of the economy developed in Chapter 3, graphically illustrate the impact of reducing a government's budget deficit by increasing (lump-sum) taxes on household income. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction curves shift; and v. the terminal equilibrium values.
b. State in words what happens to: i. the real interest rate; ii. national saving; iii. investment; iv. consumption; and v. output.
Savings
Money that is put aside for future use rather than spent immediately, often in accounts that yield interest.
Interest Rates
The percentage of a loan charged as a cost of borrowing or paid as a part of return on savings, typically expressed as an annual percentage of the principal.
Classical Economists
A group of economists in the late 18th and early 19th centuries who believed in the theory that markets function best without government intervention.
Adam Smith
A Scottish economist, philosopher, and author known as the father of modern economics, famous for his work "The Wealth of Nations."
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