Homework Answers
Solution:
As the government spending increased, the fiscal stimulus increased in the economy due to multiplier effect. That is, the increased in government spending increased the aggregate expenditure, and thus real GDP and income in economy due to multiplier effect.
Increase in income = multiplier*increase in govt. Spending
Increase in income = 1.5*200 b = 300 b
This increase in income resulted in higher tax revenues for the government. Since, both government spending and tax revenues have positive increase, current deficit is lower than increase in government spending.
So, correct option is (C).
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