Suppose the Government Decides to Reduce the Budget Deficit by Cutting

Essay

Suppose the government decides to reduce the budget deficit by cutting government spending.a.Use the Keynesian-cross model to illustrate graphically the impact of a reduction in government purchases on the equilibrium level of income.Be sure to label:
i.the axes
ii.the curves
iii.the initial equilibrium values
iv.the direction the curve shifts
v.the terminal equilibrium values.b.Explain in words what happens to equilibrium income as a result of the cut in government spending and the time horizon appropriate for this analysis.