A Suppose a Government Moves to Reduce a Budget Deficit

Essay

a. 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 budget deficit by increasing (lump-sum) taxes on household income. Be sure to label:
i. the axes
ii. the curves
iii. the inifial equilibrium values
iv. the direction curves shiff
v. the terminal equilibriom valnes.

b. State in words what happens to:
i. the real interest rate
ii. national saving
iii. investment
iv. consumption
v. output.