In the aggregate expenditures model, we note that an increase in government purchases G and an increase in lump-sum taxes T of the same amount will have:
A) The same magnitudes of impact on equilibrium GDP, though in opposite directions
B) Different effects on GDP, with the change in G having a larger impact than the change in T
C) Different effects on GDP, with the change in T having a larger impact than the change in G
D) Essentially the same effect on equilibrium GDP, both in magnitude and in direction

Question

Quizplus · Accepted Answer

An increase in government purchases (G) directly increases aggregate demand, while an increase in taxes (T) reduces disposable income and thus consumption. The multiplier effect of G is typically larger than that of T, leading to a larger impact on GDP from changes in G.

In the Aggregate Expenditures Model, We Note That an Increase