If higher taxes affect worker productivity, then the expansionary effect of balanced-budget fiscal policy changes is increased.

Question

Quizplus · Accepted Answer

Balanced-budget fiscal policy changes imply that any increase in government spending is matched by an increase in taxes to keep the budget balanced. If higher taxes negatively affect worker productivity, this could dampen the expansionary effect of increased government spending because lower productivity can lead to lower economic output.

If Higher Taxes Affect Worker Productivity, Then the Expansionary Effect