Suppose the government of Nettland wants to finance a $1 million increase in government spending by raising taxes

Economics May 06, 2021

Suppose the government of Nettland wants to finance a $1 million increase in government spending by raising taxes. The tax increase decreases total consumers' disposable incomes by million. If consumer spending changes by 80% of the change in consumers' income, then the net effect of the increase in government spending will be a in aggregate expenditure.

Expert Solution

Decrease in disposable income = Increase in government * (1 - Change in consumer spending)

= $1 * (1 - 80%)

= $0.20 million

Total consumers' disposable income decrease by $0.2 million. If consumer spending changes by 80% of the change in consumers' income, then the net effect of the increase in government spending will be a increase in aggregate expenditure.

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