Answer to Question #154151 in Macroeconomics for Gayathri

Question

Suppose that government spending was increased by 15 million and that this increase was financed by a 15 million increase in taxes. Would equilibrium income change or remain the same as a result of these two policy actions and why is it important? If equilibrium income changed, in which direction would it move, and by how much? Explain.

Answer 1

The equilibrium income remains the same since output will go up by that same amount since the balanced budget is equal to 1.

It would move to the right since more income would be supplied to the economy increasing the supply of cash and quantity in the market. This will lead to increase in equilibrium income.