Question

An increase in government spending of $300 billion and a tax cut of $300 billion will have _____ effects on the budget balance and _____ effects on real GDP. unequal; equal equal; equal equal; unequal unequal; unequal

Answer 1

Answer:

An increase in government spending of $300 billion and a tax cut of $300 billion will have EQUAL effects on the budget balance and UNEQUAL effects on real GDP.

Explanation:

Both actions will increase the budget deficit by $300 billion each.

But the total effect of government spending in the aggregate demand is determined by the government spending multiplier = 1/marginal propensity to save (MPS).

On the other hand, the effect of the tax cut will be determined by the marginal propensity to consume (MPC).