If government spending falls and taxes rise, both will _____, but the effects of _____.
A) lower equilibrium income; government spending will be larger
B) lower equilibrium income; taxes will be larger
C) raise equilibrium income; government spending will be larger
D) raise equilibrium income; taxes will be larger

Question

Quizplus · Accepted Answer

When government spending falls and taxes rise, both actions typically lower equilibrium income because government spending directly injects money into the economy, stimulating demand, while higher taxes reduce disposable income and consumption. The effect of a decrease in government spending is generally considered larger because it directly pulls money out of the economy, whereas the effect of a tax increase might be more distributed and can be partially saved or invested rather than spent.

If Government Spending Falls and Taxes Rise, Both Will _____