A $100 increase in both government expenditure and taxes will

A $100 increase in both government expenditure and taxes will

Select one:

a. lead to a $100 decrease in the equilibrium level of output

b. lead to a greater than $100 increase in the equilibrium level of output

c. cancel each other out so that the equilibrium level of output will remain unchanged

d. lead to a $100 increase in the equilibrium level of output

Answer

c. cancel each other out so that the equilibrium level of output will remain unchanged

This is because equal increases in government spending and taxes will a. cancel each other out so that the equilibrium level of real GDP will remain unchanged

Explanation

It is apparent here that if the expenditure increases and the taxes increases with the same rate, then the change in growth may not be felt because what happens is that whatever the expenditure generates from the nations production, is returned to reserves as tax. This may even cause situations to be unfavorable for small scale producers because the taxes will make it hard to utilize the capital and factors improved by the expenditure