Explain in Detail What Effect a Reduction in Government Spending

question 59

Essay

Explain in detail what effect a reduction in government spending will have on: (1)the LM curve; and (2)the IS curve.

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Definitions:

Sales

The activities involved in selling products or services in return for money or other compensation.

Residual Income

The amount of income that an entity has after all personal debts and expenses have been paid, often used in personal finance, or an approach to measure a department's or investment's profitability after charging cost of capital.

Invested Capital

The cumulative sum of funds invested by stockholders and creditors into a firm for long-term purposes.

Interest Rate

The amount charged by a lender to a borrower for the use of assets, usually expressed as a percentage of the principal.