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

Question

Quizplus · Accepted Answer

This is because an increase in government purchases directly adds to aggregate demand, while a decrease in autonomous net taxes indirectly increases aggregate demand through an increase in disposable income and consumption. Therefore, the multiplier effect on real GDP is greater with an increase in government purchases.

A $200 Increase in Government Purchases Has a Greater Effect