-Refer to the figure above to answer this question.If government spending is G₁ and GDP is Y₁,why won't a reduction in government spending by the size of the budget deficit eliminate the deficit? A)Because GDP and NTR will decrease as a result of the decrease in government spending. B)Because government spending is a function of income. C)Because GDP will rise as a result of the decrease in government spending. D)Because NTR will rise as a result of the decrease in government spending.

Question

Quizplus · Accepted Answer

A reduction in government spending will lead to a decrease in GDP and net tax revenues (NTR), as government spending is a component of GDP. This decrease in GDP can lead to lower tax revenues, which may not offset the reduction in government spending, thus not eliminating the deficit.

-Refer to the Figure Above to Answer This Question