If government purchases and taxes are both increased by the same lump sum, we can expect the following in the medium run:
A)output, prices, and interest rates will all remain unchanged
B)output, prices, and interest rates will all decrease
C)output, prices, and interest rates will all increase
D)output and prices will remain the same but interest rates will increase
E)output and prices will increase but interest rates will remain the same

Question

Quizplus · Accepted Answer

In the medium run, an increase in government purchases increases aggregate demand, leading to higher output and prices. The increase in taxes offsets some of this effect, but typically not completely, resulting in higher interest rates due to increased demand for money.

If Government Purchases and Taxes Are Both Increased by the Same