There would be no effect on the level of economic activity if the federal government increased both its purchases of goods and services and personal income taxes by $100 billion.

Question

Quizplus · Accepted Answer

Increasing both government spending and taxes by the same amount can still affect economic activity due to the differing marginal propensities to consume (MPC) between the government and taxpayers. The government's spending directly adds to demand, while the increase in taxes reduces consumers' disposable income, potentially reducing their spending by less than the increase in government spending if their MPC is less than 1. This can lead to a net increase in aggregate demand and thus economic activity.

There Would Be No Effect on the Level of Economic