A government takes action to reduce the size of its budget deficit. This action will cause[ Select ]and therefore (all else the same),the demand for funds towe can expect interest rates to [Select ]« PreviousNextGFeels instantlyto care for yourDrug FactsActive ingredientWarnings:

Answered: A government takes action to reduce the…

Principles of Economics (MindTap Course List)

8th Edition

ISBN:9781305585126

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter36: Six Debates Over Macroeconomic Policy

Section: Chapter Questions

Problem 6PA

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Question

A government takes action to reduce the size of its budget deficit. This action will cause
[ Select ]
and therefore (all else the same),
the demand for funds to
we can expect interest rates to [Select ]
« Previous
Next
G
Feels instantly
to care for your
Drug Facts
Active ingredient
Warnings:

Expert Solution

Step 1

Meaning of Budget Deficit:

The term budget deficit refers to the situation under which the government expenses expand more rather than spending on particular individuals, as compared to the revenue earned by the government.

Thus the budget deficit occurs when unintentional expenses occurred and exceed the revenue earned by the government.

Step 2

Given Situation:

As the government takes action to reduce the size of its budget deficit, thus the government reduces the budget deficit through two ways:

Raising Taxes Rates and,
Decreasing government spending

Thus, as the taxes get raises, thus it decreases the aggregate demand. Aggregate demand here includes:

$A g g r e g a t e D e m a n d = C o n s u m p t i o n + I n v e s t m e n t + G o v e r n m e n t S p e n d i n g$

Therefore,

As the factor under aggregate demand decreases, thus it also reduces the prices and falls the output level.

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