If Government Spending in a Country Declines by $10 Billion

question 4

Multiple Choice

If government spending in a country declines by $10 billion and, at the same time, taxes increase by an equal amount, what is the total effect in the economy?

• A) Equilibrium real GDP increases
• B) Equilibrium real GDP increases by $20 billion
• C) Equilibrium real GDP is unchanged
• D) Equilibrium real GDP decreases by more than $10 billion and less than $20 billion
• E) Equilibrium real GDP decreases by more than $20 billion

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Definitions:

Factor of Production

An economic resource that is used to produce goods and services, including land, labor, capital, and entrepreneurship.

Average Expenditure Curve

Supply curve representing the price per unit that a firm pays for a good.

Substitution Effect

The change in consumption resulting from a change in price, causing consumers to substitute cheaper goods for more expensive ones.

Wage

Monetary compensation paid by an employer to an employee in exchange for work performed, typically calculated on an hourly, daily, or piecework basis.