In order to maintain a balanced budget, Congress has decided to cut taxes and government spending both by $25 billion.What will happen to GDP?
A)It will increase.
B)It will remain the same.
C)It will decrease.
D)It's impossible to know without the multiplier.

Question

Quizplus · Accepted Answer

When the government cuts spending, it reduces its own demand for goods and services, which can cause a decrease in the overall demand in the economy. This reduction in demand can lead to a decrease in GDP. The cut in taxes may provide some stimulus to the economy, but it is unlikely to fully offset the negative effects of the spending cuts. Therefore, GDP is likely to decrease.

In Order to Maintain a Balanced Budget, Congress Has Decided