The federal budget is balanced and the economy is on the upward-sloping portion of the Laffer curve.Then,tax rates are cut and government purchases are increased.Is a budget deficit inevitable?
A) No,because a cut in tax rates (on the upward-sloping portion of the Laffer curve)increases tax revenues,and if the increase in tax revenues equals the increase in government purchases there is no deficit.
B) Yes,because a cut in tax rates (on the upward-sloping portion of the Laffer curve)lowers tax revenues.
C) No,because a cut in tax rates (on the upward-sloping portion of the Laffer curve)decreases tax revenues,and if the decrease in tax revenues is less than the increase in government purchases there is no deficit.
D) Yes,because a cut in tax rates (on the upward-sloping portion of the Laffer curve)raises interest rates,and higher interest rates discourage investment spending.

Question

Quizplus · Accepted Answer

On the upward-sloping portion of the Laffer curve, a cut in tax rates lowers tax revenues. If government purchases are increased while tax revenues decrease, a budget deficit is inevitable.

The Federal Budget Is Balanced and the Economy Is on the Upward-Sloping