A tax increase of $250 will exactly offset a $250 increase in government purchases,leaving aggregate demand unaffected.

Question

Quizplus · Accepted Answer

A $250 tax increase will not fully offset a $250 increase in government purchases because the multiplier effect of government spending is typically larger than the multiplier effect of a tax increase. This is due to the fact that not all of the tax increase would be subtracted from consumption; some of it might be absorbed by savings, reducing the impact on aggregate demand compared to direct government spending.

A Tax Increase of $250 Will Exactly Offset a $250