Answer to Question #97654 in Macroeconomics for Tiffany

Question

Apply your knowledge of the AD/AS model to predict the effect on economic variables (i.e., P, RGDP, interest rates, wages, savings and spending) of some events on the U.S. economy. Diagram the effect of the following events. Be sure to explain the effects in the short run and effects in the long run for each question, in words. To keep things clear, assume that in each case the economy starts out at long-run equilibrium.
c. The government increases both taxes and spending by $500 billion. The money is spent domestically. Hint: Be sure to provide a strict interpretation of the AD/AS model as part of your answer.

Answer 1

The government has two levers when setting fiscal policy: it can change the levels of taxation and/or it can change its level of spending.

Expansionary policy shifts the aggregate demand curve to the right, while contractionary policy shifts it to the left.

An increase in government spending and an increase in taxes leads to completely different consequences. However, if the state increases its expenses and raises taxes by the same amount, these two tools cancel each other out.

That is, no macroeconomic indicators will change.

https://courses.lumenlearning.com/boundless-economics/chapter/introduction-to-fiscal-policy/