Use the following to answer questions:
-(Figure 7-1: Circular-Flow Model) Use Figure 7-1: Circular-Flow Model. If the circular-flow model is in equilibrium (the sum of money flowing into each box is equal to the sum of the money flowing out of it) and there is a decrease in government spending, holding everything else constant, which outcome is likely to occur?
A) an increase in the nominal GDP
B) an increase in the real GDP
C) an increase in the unemployment rate
D) an increase in the inflation rate

Question

Use the following to answer questions: 
-(Figure 7-1: Circular-Flow Model) Use Figure 7-1: Circular-Flow Model. If the circular-flow model is in equilibrium (the sum of money flowing into each box is equal to the sum of the money flowing out of it) and there is a decrease in government spending, holding everything else constant, which outcome is likely to occur?
A) an increase in the nominal GDP 
B) an increase in the real GDP 
C) an increase in the unemployment rate 
D) an increase in the inflation rate

Quizplus · Accepted Answer

A decrease in government spending will lead to a decrease in the flow of money into the government sector. This will disrupt the equilibrium of the circular-flow model, and the amount of money flowing out of the government sector will be greater than the amount of money flowing in. This will lead to a decrease in income for firms and households, which will result in a decrease in aggregate demand and ultimately an increase in the unemployment rate. Therefore, option C is the correct choice. Options A, B, and D are not likely outcomes in this scenario.

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