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 policymakers decide 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: (a) the axes, (b) the curves, (c) the initial equilibrium values, (d) the direction the curve shifts, and (e) the final equilibrium values. Explain in words what happens to equilibrium income as a result of the cut in government spending. (100 words max)
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