In the neoclassical model with fixed income, if there is a decrease in government spending with no change in taxes, then public saving ______ and private saving ______.
A) increases; increases.
B) increases; does not change
C) decreases; increases
D) decreases; does not change

Question

Quizplus · Accepted Answer

In the neoclassical model with fixed income, a decrease in government spending directly increases public saving because the government is spending less than before, which means it needs to borrow less or can save more. Private saving does not change because the model assumes a fixed income and no change in taxes, meaning individuals' disposable income and thus their saving behavior remain unchanged.

In the Neoclassical Model with Fixed Income, If There Is