Question

In a mixed-market economy, the government plays a role and can affect the circular flow of income. Governments participate in the economy by receiving revenue from households in the form of taxes, and by spending the money they gain from taxpaying citizens. Government expenditures can include spending money on defense, building bridges and other forms of infrastructure, and paying for programs that provide services such as education and health care. All of these types of spending inject money into an economy. However, raising taxes on workers is an example of a withdrawal that could reduce the flow of income. –“The Circular Flow of Income” How might a government deficit affect the circular flow of income? Taxes could be increased to fix the deficit, giving consumers more money to spend. Taxes could be decreased to fix the deficit, giving consumers less money to spend. Government spending could rise due to the deficit, and the economy could grow. Government spending could drop due to the deficit, and the economy could slow down.

Answer 1

A government deficit can affect the circular flow of income because the government spending could drop due to the deficit and the economy could slow down.

What is a government spending?

It refers to the total money spent by the public sector on the acquisition of goods and provision of services such as education, healthcare, social protection, defense etc.

A government budget deficit arises from an excessive government spending and low levels of taxation that don't cover expenditure.

Hence, the government deficit can affect the circular flow of income because the government spending could drop due to the deficit and the economy could slow down.

Therefore. the Option C is correct.

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