QUESTION 3 “If taxes and government spending are increased by the same amount, there will still...

QUESTION 3

“If taxes and government spending are increased by the same amount, there will still be a positive effect on equilibrium GDP.” Is this statement correct? Discuss by giving appropriate examples of scenario, data and/or diagrams to justify your answer.

ANSWER FOR QUESTION 3

Expert Solution

Ans

The given statement that if taxes and government spending are increased by same amount , there will still be a positive effect on equilibrium GDP is True because the increased government spending will create a multilplier effect . Since the increased government spending will provide employment to jobless people which will increase income of people and also spending leading to increase in aggregate demand and resulting in increase in GDP.

Example: Construction workers employed by the government increase spending in transport and other sectors thus causing other sectors of the economy to benefit from the government spending.

Rahul Sunny answered 2 years ago

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