All else equal, which of the following statements is true?
A) An economy will contract when government purchases and spending from
Transfers are equal to the amount taken from the spending stream by taxes on businesses and households.
B) An economy will contract when government purchases and spending from transfers are less than the amount taken from the spending stream by taxes on businesses and households.
C) An economy will contract when government purchases and spending from transfers are greater than the amount taken from the spending stream by taxes on businesses and households.
D) The relationship between government purchases and spending from transfers and taxes has no impact on total economic activity.

Question

Quizplus · Accepted Answer

When government purchases and spending from transfers are less than the amount taken from the spending stream by taxes on businesses and households, it means that the government is removing more money from the economy than it is injecting. This reduction in overall spending can lead to a contraction in the economy.

All Else Equal, Which of the Following Statements Is True