If government spending drops and taxes rise:
A) both will lower equilibrium income,but the effects of government spending will be larger.
B) both will lower equilibrium income,but the effects of taxes will be larger.
C) both will raise equilibrium income,but the effects of government spending will be larger.
D) both will raise equilibrium income,but the effects of taxes will be larger.

Question

Quizplus · Accepted Answer

A decrease in government spending and an increase in taxes both reduce aggregate demand, leading to a lower equilibrium income. The government spending multiplier is typically larger than the tax multiplier, meaning the impact of changes in government spending on equilibrium income is generally more significant than changes in taxes.

If Government Spending Drops and Taxes Rise