Q. Why does a temporary decrease in government purchases decrease labour supply in the classical model?
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(A)
the fall in government spending decreases labour demand, decreasing the real wage, and so people decrease their labour supply.
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(B)
the decrease in current or future taxes needed to pay for the decrease in government purchases increases people\s wealth.
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(C)
people prefer to work less when the government is doing less for them.
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(D)
decreased government purchases make people worse off, so they work less hours.
✅ Correct Answer: (B)
the decrease in current or future taxes needed to pay for the decrease in government purchases increases people\s wealth.