If the government increases expenditure by $40 billion and increases tax revenue by $40 billion, what is the impact on aggregate demand? Explain your answer
What will be an ideal response?
Aggregate demand increases. The government expenditure multiplier shows that the increase in government expenditure increases aggregate demand by more than $40 billion. And the government tax multiplier shows that the increase in tax revenue decreases real GDP by more than $40 billion. But, the magnitude of the government expenditure multiplier exceeds the magnitude of the tax multiplier, so the net effect, which is the balanced budget multiplier, is that aggregate demand increases.
You might also like to view...
Items that are purchased by individuals for their own enjoyment are called
A) consumption goods and services. B) capital goods. C) government goods and services. D) exports of goods and services. E) private goods.
Duties of the Council of Economic Advisers include
a. advising the president and writing the annual Economic Report of the President. b. implementing the president's tax policies. c. tracking the behavior of the nation's money supply. d. All of the above are correct.