Assume that tax revenue is represented by the following function: T = - 200 + .25Y, where the first term represents transfer payments and the second term represents gross tax revenue. Assume furthermore that government spending is $400 billion and the economy is in equilibrium at $2000 billion. Why would a cut in government spending by $100 billion not cause the budget deficit to disappear? If the income multiplier were two, what will the value of the budget deficit be after the cut in spending?

Question

Quizplus · Accepted Answer

The Answer of Assume that tax revenue is represented by the following function: T = - 200 + .25Y, where the first term represents transfer payments and the second term represents gross tax revenue. Assume furthermore that government spending is $400 billion and the economy is in equilibrium at $2000 billion. Why would a cut in government spending by $100 billion not cause the budget deficit to disappear? If the income multiplier were two, what will the value of the budget deficit be after the cut in spending?

Assume That Tax Revenue Is Represented by the Following Function