In this section, we ask two related questions. First, how does a cut in taxes affect consumer demand? Second, does a large government budget deficit pose any sort of ‘problem’ for the economy? These two questions are related because cutting taxes generally implies increasing the deficit, at least, to the extent that program spending (g1, g2) is left unaltered. Another way to ask the question being posed here is: What are the likely effects of a deficit-financed tax cut?
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