Suppose the government decides to increase taxes by $50 billion and to increase transfer payments by $50 billion.What effect would there be on aggregate demand?

Question

Quizplus · Accepted Answer

The increase in taxes and transfer payments by the same amount will have no net effect on aggregate demand because the increase in taxes reduces disposable income by the same amount that transfer payments increase it, leaving overall spending unchanged.

Suppose the Government Decides to Increase Taxes by $50 Billion