Answer to Question #123385 in Macroeconomics for zarakhadija

Question

suppose government spending was increased by 10 units and that this increase was financed by a 10 unit increase in taxes. Would equilibrium income change or remain the same as a result of these two policy actions? If equilibrium income changed in which direction would it move, and by how much

Answer 1

If the government spending increases by 10 units and the taxes imposed also incseased by 10 per unit therefore, the two operations will counter-balance each other, meaning there will be no increase in aggregate demand. Equilibrium income won't change because aggregate supply will be equal to aggregate demand. Therefore,there will be no shift in the graph