Suppose Congress increased spending by $100 billion and raised taxes by $100 billion to keep the budget balanced.What will happen to real equilibrium GDP?
A)Real equilibrium GDP will fall.
B)Real equilibrium GDP will rise.
C)There will be no change in real equilibrium GDP.
D)Real equilibrium GDP will initially rise,but then fall below its previous equilibrium value.

Question

Quizplus · Accepted Answer

When Congress increases spending by $100 billion, it directly injects money into the economy, which increases aggregate demand and thus raises real equilibrium GDP. The tax increase could potentially offset this effect by reducing disposable income and consumption, but government spending tends to have a more direct and immediate impact on aggregate demand than tax changes do on aggregate supply. Therefore, the net effect is an increase in real equilibrium GDP.

Suppose Congress Increased Spending by $100 Billion and Raised Taxes