The diagram below shows the budget deficit function for a government in a hypothetical economy. FIGURE 31-1 Refer to Figure 31-1.Initially,suppose real GDP is $100 million and the budget deficit is $4 million,as shown by point A.If the government implements a contractionary fiscal policy by decreasing its purchases of goods and services,then

Question

The diagram below shows the budget deficit function for a government in a hypothetical economy.  FIGURE 31-1 Refer to Figure 31-1.Initially,suppose real GDP is $100 million and the budget deficit is $4 million,as shown by point A.If the government implements a contractionary fiscal policy by decreasing its purchases of goods and services,then

Quizplus · Accepted Answer

When the government decreases its purchases of goods and services, it will cause a decrease in aggregate demand and real GDP. This will result in a decrease in tax revenues and an increase in transfer payments, therefore increasing the budget deficit. This shift is represented by a downward shift of the budget deficit function, as shown in the diagram. Therefore, the best answer is B.

The Diagram Below Shows the Budget Deficit Function for a Government