If a tax increase affects aggregate supply, then a balanced-budget change in fiscal policy will have a larger expansionary effect on equilibrium real GDP than otherwise.

Question

Quizplus · Accepted Answer

A tax increase affects aggregate supply, which is a long-run concept in macroeconomics. A balanced-budget change in fiscal policy, on the other hand, affects aggregate demand, which is a short-run concept. Therefore, a balanced-budget change in fiscal policy will have the same impact on equilibrium real GDP regardless of whether there was a tax increase or not.

If a Tax Increase Affects Aggregate Supply, Then a Balanced-Budget