The government decides to reduce its expenditure by $250. The multiplier in this economy is 4 and the tax rate is 22 percent. The net effect of this contractionary fiscal policy is to:

Question

Quizplus · Accepted Answer

The government's expenditure reduction of $250 leads to a decrease in aggregate demand of $250 * 4 = $1000. The tax rate of 22 percent implies that the government collects $1000 * 0.22 = $220 in additional tax revenue. Therefore, the net effect of the contractionary fiscal policy is to decrease the budget deficit by $220.

The Government Decides to Reduce Its Expenditure by $250