Consider the simplified economy with proportional taxes on wage income. Suppose the

government funds initial expenditures G1 with the tax rate on the downward sloping part

of the Laffer curve. If the government reduces expenditures to G2 < G1 then in the new

competitive equilibrium,

(a) consumption must decrease, output will fall, and welfare will decrease.

(b) consumption must decrease, output can rise or fall, and welfare will decrease.

(c) consumption must increase, output will rise, and welfare will increase.

(d) consumption must increase, output can rise or fall, and welfare will increase.