If both government expenditure, G, and taxation, T, increase by the same amount, so that government deficit or surplus does not change, then in the new equilibrium:
A)output remains constant.
B)the interest rate declines.
C)output increases.
D)none of the above.

Question

Quizplus · Accepted Answer

This scenario describes a fiscal policy where both government expenditure (G) and taxation (T) increase by the same amount, leaving the government's budget balance unchanged. However, this action can lead to an increase in output due to the government spending multiplier effect being typically larger than the tax multiplier effect. When the government spends more, this directly increases demand in the economy, leading to higher output. The increase in taxes does reduce disposable income and thus consumption, but the immediate and direct impact of government spending on demand is usually stronger, leading to an overall increase in output.

If Both Government Expenditure, G, and Taxation, T, Increase by the Same