posted by .

I have an assignment question regarding the impact of reducing the government's budget deficit by reducing government purchases.

I have to develop a S/D graph with curves to illustrate this impact.

I know that when the government makes purchases and runs a deficit, supply of investments and savings (loanable funds) shifts left.

When the government reduces purchases, does the demand curve shift left or does the supply curve shift back to the right?

Also what is the shifting for an income tax increase to lower the budget deficit?

  • Macroeconomics -

    Government purchases are a component of aggregate demand. Reducing government purchases means reducing aggregate demand; the demand curve shift inward. GDP falls, Prices decline.

    I would not necessarily shift the supply of loanable funds curve when governments run a deficit. Rather, a deficit leads to an increase in demand for loanable funds. With movement along the supply curve, interest rates rise (and as a result, private investment falls) This is the so-called crowding out effect.

    Income taxes reduce disposable income which in turn reduces consumption, a component of aggregate demand.

Respond to this Question

First Name
School Subject
Your Answer

Similar Questions

  1. macroeconomics

    Assignment questions: When the government reduces its budget deficit (reduces government purchases) does consumption rise or fall?
  2. macroeconomics

    Assume that the government purchases decrease by 10 billion, with other factors held constant including the price level. Calculate the change in the level of real GDP demanded for each of the following values of the MPC. Then calculate …
  3. macroeconomics

    Increased government purchases, with taxes held constant, can eliminate a contractionary gap. How could a tax cut achieve the same result?
  4. macroeconomics

    what happens to the net public debt if the federal government operates next year with a : budget deficit, balanced budget, budget surplus
  5. Economics

    Can someone help me with this question..Pleaseeee!! Suppose a government moves to reduce a budget deficit. Using the long-run model of the economy developed in Chapter 3, graphically illustrate the impact of reducing a government's …
  6. university of port harcourt

    illustrate how government spending and taxation will impact on macroeconomics equilibrum in a closed economy
  7. government

    what does reducing the national deficit even mean ?
  8. Government US

    15. What happened in 1998? b. The U.S. government had its largest budget deficit in history. c. The national debt was eliminated. d. The U.S. government shut down on three occasions. e. The U.S. government had a balanced budget. i
  9. Macroeconomics

    Suppose the government starts with a balanced budget. Then, there is an increase in government spending, but there is no change in taxes. Show in an IS-LM diagram the effect of this policy on output in the short run. How will the government …
  10. civics

    Which statement regarding the impact of the federal government's budget on the personal budgets of citizens is true for the greatest number of citizens?

More Similar Questions