Answer to Question #154469 in Macroeconomics for Malith

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 remain the same.

This because as the government spending increase on other increased taxes will reduce people's disposable income hence reducing their consumption and expenditures too.