If the government increases its purchases by $200 billion but at the same time raises lump-sum taxes by $200 billion, then equilibrium GDP will remain constant.

Question

Quizplus · Accepted Answer

An increase in government purchases has a direct impact on aggregate demand, while an increase in taxes reduces disposable income and consumption. The net effect depends on the marginal propensity to consume, but typically, the increase in government spending has a larger multiplier effect, leading to an increase in equilibrium GDP.

If the Government Increases Its Purchases by $200 Billion but at the Same