Why don’t identical shifts in government spending and taxes have the same effect on GDP?
What will be an ideal response?
A change in government spending causes a direct shift in the aggregate expenditures curve equal to that change in spending. A change in taxes, however, will not have an equivalent shift in the AE curve because taxes have an effect on both consumption and savings, and the total effect of the two is the net effect of taxes. Since the change in consumption is the only effect that will be reflected in the AE curve, as savings is not included in that curve, the shift in AE from a change in taxes will be smaller than the total effect of a change in taxes. Thus a change in taxes will have less of an effect on GDP as an identical change in government spending.
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Indicate whether the statement is true or false
An individual firm has little incentive to voluntarily internalize any external costs it was creating because: a. it would shift its cost curves downward
b. it would put it at a competitive disadvantage compared to its rivals. c. it would have to increase output to make up for the added costs. d. they do not care at all about other people.