Answer to Question #95253 in Macroeconomics for komal

Question

10. Suppose that 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? Explain.

Answer 1

       The Government Spending.

           In a case where the government spending is increased by 10 units and is as a result of increase in taxes by 10 units to finance it, then the two policies counter-balance each other. Therefore there will be no increase in aggregate demand. The equilibrium income as a result will not change because aggregate supply will be equal to aggregate demand. In this case there is no any shift realized in the equilibrium income.

                                               Reference.

Tejvan Pettinger;< https://www.economicshelp.org/blog/2731/economics/impact-of-increasing-government-spending/ >March 19,2017.