Question

Suppose congress enacts a $500 billion increase in spending and a $500 billion

tax increase to finance the additional government spending. The result of the
balanced-budget approach is a:
O $1,000 billion decrease in aggregate demand.
O $500 billion decrease in aggregate demand.
O $1,500 decrease in the aggregate supply.
O $500 billion increase in aggregate demand.
O $1,000 billion decrease in aggregate demand.

Answer 1

The result of a $500 billion increase in spending and a $500 billion tax increase to finance the additional government spending is that the aggregate demand would theoretically remain unchanged.

Step-by-step explanation:

If Congress enacts a $500 billion increase in government spending and counters it with a $500 billion tax increase to maintain a balanced budget, the aggregate demand in the economy would theoretically remain unchanged because the increase in government spending is offset by an equal amount of reduction in private spending due to the higher taxes. Thus, these actions would not increase the aggregate demand but rather redistribute the spending power from the private sector to the government sector. It should also be noted that in practice, the exact impact on the economy could differ due to factors like the marginal propensity to consume (MPC), multipliers, and other economic behaviors.