Suppose that the economy is in a recession as a result of a fall in investment spending and real GDP is below potential GDP. (a) Illustrate this on an aggregate demand in ation diagram. (b) When real GDP falls, what happens to tax revenue, government spending, and the budget balance? (c) If a balanced budget amendment were in place, what would have to happen to government spending and/or taxes? Illustrate on the diagram. (d) Is it wise to allow the government to run a de cit during a recession and a surplus during an expansion?
Suppose that the economy is in a recession as a result of a fall in investment spending and real GDP is below potential GDP. (a) Illustrate this on an aggregate demand in ation diagram. (b) When real GDP falls, what happens to tax revenue, government spending, and the budget balance? (c) If a balanced budget amendment were in place, what would have to happen to government spending and/or taxes? Illustrate on the diagram. (d) Is it wise to allow the government to run a de cit during a recession and a surplus during an expansion?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Suppose that the economy is in a recession as a result of a fall in investment spending and real GDP is
below potential GDP.
(a) Illustrate this on an aggregate demand in
ation diagram.
(b) When real GDP falls, what happens to tax revenue, government spending, and the budget balance?
(c) If a balanced budget amendment were in place, what would have to happen to government spending
and/or taxes? Illustrate on the diagram.
(d) Is it wise to allow the government to run a de cit during a recession and a surplus during an expansion?
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