If government increases taxes by the same amount it increases government spending,there will be no effect on aggregate demand: the increase in government spending is offset by an equal decrease in consumption spending by households.

Question

Quizplus · Accepted Answer

If government increases taxes by the same amount it increases government spending, there will still be an effect on aggregate demand. This is because the decrease in consumption spending by households will not necessarily offset the increase in government spending, as households may choose to save their money or invest it in other ways rather than immediately spending it. Therefore, overall aggregate demand may still increase or decrease depending on various factors such as the multiplier effect and the composition of the government spending.

If Government Increases Taxes by the Same Amount It Increases