Congress is debating whether to raise taxes by $100 billion or decrease spending by $100 billion in order to eliminate a budget deficit.Which action will have the larger effect on equilibrium GDP?
A)the increase in taxes
B)the decrease in spending
C)the effects will be equal
D)not possible to determine without knowing the multiplier

Question

Congress is debating whether to raise taxes by $100 billion or decrease spending by $100 billion in order to eliminate a budget deficit.Which action will have the larger effect on equilibrium GDP?
A)the increase in taxes 
B)the decrease in spending 
C)the effects will be equal 
D)not possible to determine without knowing the multiplier

Quizplus · Accepted Answer

A decrease in government spending will have a larger effect on equilibrium GDP than an increase in taxes. This is because a decrease in government spending will directly decrease aggregate demand and therefore decrease equilibrium GDP. On the other hand, an increase in taxes will decrease disposable income and consumer spending, but the effect on aggregate demand is not as direct and immediate. As for the multiplier effect, without knowing the specific values of the spending and tax multipliers, it is not possible to determine the exact effect on equilibrium GDP.

Congress Is Debating Whether to Raise Taxes by $100 Billion