If the government increases taxes by $4 billion and increases spending by $4 billion, equilibrium output increases by $4 billion.

Question

Quizplus · Accepted Answer

The increase in government spending will shift the Aggregate Demand curve to the right, resulting in an increase in equilibrium output by the amount of the increase in government spending. The increase in taxes can dampen this effect, but since the increase in spending is equal to the increase in taxes, the net effect is an increase in equilibrium output by $4 billion.

If the Government Increases Taxes by $4 Billion and Increases