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

Decreasing the government's purchases of goods and services (which decreases government spending) would lead to a decrease in aggregate demand and a decrease in real GDP. As real GDP falls, tax revenue will also fall, leading to an increase in the budget deficit. This means that the budget deficit function would shift down, as shown in the diagram. Therefore, the correct answer is choice B.

The Diagram Below Shows the Budget Deficit Function for a Government