An increase in government transfer payments of $250 billion and a tax cut of $250 billion will have _____ effects on the budget balance and _____ effects on real GDP.

Question

Quizplus · Accepted Answer

An increase in government transfer payments of $250 billion will increase the budget deficit by $250 billion. A tax cut of $250 billion will also increase the budget deficit by $250 billion. Therefore, the total effect on the budget balance will be an increase of $500 billion. An increase in government transfer payments will increase aggregate demand, which will lead to an increase in real GDP. A tax cut will also increase aggregate demand, which will lead to an increase in real GDP. Therefore, the total effect on real GDP will be an increase.

An Increase in Government Transfer Payments of $250 Billion and a Tax