PRC-3 · Chapter 9 · Question 9 of 45
A government increases taxes heavily and reduces its own spending. How will this combined action affect the circular flow of national income?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) It will decrease the level of economic activity because leakages exceed injections
Explanation
Taxes are a leakage and government spending is an injection. High taxes and low spending mean leakages are greater than injections, leading to economic contraction.
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