The government increases both taxes and spending by $500 billion. How does this effect the AD/AS model?

Question

The government increases both taxes and spending by $500 billion. The money is spent domestically. How does this effect the AD/AS model?

Answer 1

Using the Mafia model . Some get rich while others get ripped off .

Answer 2

Im not sure how to answer your question because idk what the AD/AS/model is. and the to the guy b4 me....dont answer if you really dont have a idea

Answer 3

Let MPC=0.5

ΔY/ΔG=1/(1-MPC) =1/0.5=2

ΔY/ΔT=-MPC/(1-MPC)= -0.5/0.5= -1

Taxes reduce AD by -500 Billions

Gov spending increase AD by 500*2=1'000 Billions

AD will shift rightward by 1'000-500=+500 billions

Answ:

In AD/AS model it will cause price level to rise and GDP to rise (depending on long/short-runs) because tax multiplier is less than gov spending multiplier.