Final answer:
It is false that an increase in a lump-sum tax has the same effect on equilibrium GDP as an equal decrease in government purchases. These fiscal policy tools work differently in the economy, with taxes affecting disposable income and consumer spending, while government purchases directly impact expenditure.
Step-by-step explanation:
The statement that an increase in a lump-sum tax has the same effect on equilibrium GDP as an equal decrease in government purchases is false. While both fiscal policy tools can influence the economy, their effects are not identical due to the different mechanisms through which they work. An increase in taxes reduces disposable income for consumers, which leads to a decrease in consumer spending. Meanwhile, a reduction in government purchases directly removes expenditure from the economy. These actions affect different components of the aggregate expenditure function.
According to the LibreTexts™ material, a tax cut can lead to an increase in the quantity of labor supplied, potentially increasing real GDP. The relationship among private savings (S), taxes (T), government spending (G), imports (M), exports (X), and investment (I) indicates that any change in these variables necessitates an adjustment in the others to maintain an equilibrium in the supply and demand for financial capital in the macro economy.
In response to a recessionary gap, the government could either reduce taxes or increase spending to push aggregate expenditure upwards, leading to a new equilibrium at potential GDP. This suggests that both tax changes and government spending adjustments play distinct roles in fiscal policy and the effects they have on equilibrium GDP.