Below is some data for a hypothetical economy:

-Refer to the information above to answer this question.Suppose the economy is presently in equilibrium.If the government increases its spending by the amount of its current surplus/deficit,what will be the result?
A)Increase equilibrium income by $40 and increase the surplus.
B)Increase equilibrium income by $40 and reduce the surplus.
C)Increase equilibrium income by $80 and increase the surplus.
D)Increase equilibrium income by $80 and reduce the surplus.
E)Increase equilibrium income by $40 and balance the budget.

Question

Below is some data for a hypothetical economy:
 
-Refer to the information above to answer this question.Suppose the economy is presently in equilibrium.If the government increases its spending by the amount of its current surplus/deficit,what will be the result?
A)Increase equilibrium income by $40 and increase the surplus. 
B)Increase equilibrium income by $40 and reduce the surplus. 
C)Increase equilibrium income by $80 and increase the surplus. 
D)Increase equilibrium income by $80 and reduce the surplus. 
E)Increase equilibrium income by $40 and balance the budget.

Quizplus · Accepted Answer

Based on the given information, the government has a surplus or deficit of $40 in this economy. If the government increases its spending by this amount, it would increase the aggregate demand and shift the aggregate demand curve to the right. This would lead to an increase in equilibrium income and output. However, since the government is already running a surplus or deficit, this increase in government spending would reduce or eliminate the surplus/deficit. The option that reflects this scenario is option B, where equilibrium income increases by $40 and the surplus is reduced.

Below Is Some Data for a Hypothetical Economy