Assume That Tax Revenue Is Represented by the Following Function

Essay

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?