Final answer:
Increasing government spending by $1 trillion has a greater potential to impact total GDP compared to decreasing taxes by $1 trillion. Government spending directly contributes to the national economy by creating jobs, stimulating consumption, and boosting economic growth.
Step-by-step explanation:
The impact of increasing government spending by $1 trillion or decreasing taxes by $1 trillion on total GDP depends on various factors. In general, increasing government spending has a greater potential to impact total GDP compared to decreasing taxes. This is because government spending directly contributes to the national economy by creating jobs, stimulating consumption, and boosting economic growth.
For example, when the government increases spending on infrastructure projects, such as building roads and bridges, it creates more employment opportunities, generates income for workers, and increases demand for goods and services. This, in turn, leads to an increase in business production and contributes to the overall GDP.
On the other hand, decreasing taxes might stimulate private consumption and investment, but its impact on GDP may be modest in comparison. This is because the effect of tax cuts on the economy depends on the marginal propensity to consume and save. Some individuals may choose to save or invest their extra income, rather than spend it immediately, which might limit the immediate impact on GDP.