A $200 increase in government purchases has less of an impact on the equilibrium level of real GDP than a decrease in autonomous net taxes of $200 would.

Question

Quizplus · Accepted Answer

A $200 increase in government purchases directly increases aggregate demand by $200, while a decrease in taxes increases disposable income, which only indirectly affects aggregate demand through the marginal propensity to consume. Therefore, the impact of government purchases is typically larger.

A $200 Increase in Government Purchases Has Less of an Impact