A Suppose Congress Decides to Reduce the Budget Deficit by Cutting

Essay

a. Suppose Congress decides to reduce the budget deficit by cutting government spending. 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.