According to the model developed in Chapter 3, when government spending increases and taxes increase by an equal amount:
A) consumption and investment both increase.
B) consumption and investment both decrease.
C) consumption increases and investment decreases.
D) consumption decreases and investment increases.

Question

Quizplus · Accepted Answer

When government spending increases and taxes increase by an equal amount, it leads to a decrease in disposable income, which in turn reduces consumption. Since government spending is not directed towards investment, investment does not increase either. The crowding-out effect may also lead to higher interest rates, further reducing investment.

According to the Model Developed in Chapter 3, When Government