A government takes action to reduce the size of its budget deficit. This action will cause the demand for funds to [Select] and therefore (all else the same), we can expect interest rates to [Select]
A government takes action to reduce the size of its budget deficit. This action will cause the demand for funds to [Select] and therefore (all else the same), we can expect interest rates to [Select]
Chapter22: Aggregate Demand And Aggregate Supply
Section: Chapter Questions
Problem 12P
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Expert Solution
Step 1
Meaning of Budget Deficit:
The term budget deficit refers to the situation under which the government expenses expand more rather than spending on particular individuals, as compared to the revenue earned by the government.
Thus the budget deficit occurs when unintentional expenses occurred and exceed the revenue earned by the government.
Step 2
Given Situation:
- As the government takes action to reduce the size of its budget deficit, thus the government reduces the budget deficit through two ways:
- Raising Taxes Rates and,
- Decreasing government spending
Thus, as the taxes get raises, thus it decreases the aggregate demand. Aggregate demand here includes:
Therefore,
As the factor under aggregate demand decreases, thus it also reduces the prices and falls the output level.
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