A $100 increase in government purchases will have exactly the same effect on equilibrium real GDP as a $125 decrease in autonomous net taxes regardless of the value of the MPC.

Question

Quizplus · Accepted Answer

The effect on equilibrium real GDP depends on the marginal propensity to consume (MPC). A change in government purchases directly affects GDP, while a change in taxes affects GDP indirectly through consumption, and the two will not have the same impact unless specific conditions are met.

A $100 Increase in Government Purchases Will Have Exactly the Same