Ignoring any supply-side effects,if government expenditure on goods and services increases by $10 billion and taxes increase by $10 billion,then real GDP ________ and the price level ________.

Question

Quizplus · Accepted Answer

When government expenditure increases by $10 billion, it directly increases aggregate demand, leading to an increase in real GDP. The increase in taxes by $10 billion reduces disposable income, but the overall effect is an increase in aggregate demand because the government spending multiplier is typically larger than the tax multiplier. This results in an increase in the price level as well.

Ignoring Any Supply-Side Effects,if Government Expenditure on Goods and Services