Assume Parliament enacts a $10 billion increase in spending and a $10 billion tax increase to finance the additional government spending. The result of this balanced-budget approach is a:

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Quizplus · Accepted Answer

The balanced-budget approach, where government spending increases by the same amount as taxes, typically results in an increase in aggregate demand but not by the full amount of the spending increase. This is because the multiplier effect of government spending is generally considered to be larger than the multiplier effect of a tax increase. Therefore, a $10 billion increase in spending, offset by a $10 billion increase in taxes, would still lead to an increase in aggregate demand, but only by the amount of the spending increase, assuming the tax increase dampens demand less than the spending increase boosts it.

Assume Parliament Enacts a $10 Billion Increase in Spending and a $10