If government spending increases while taxes remain unchanged, the immediate effect in a simple aggregate-demand model is generally to:
Correct answer: B. Increase aggregate demand
- A. Reduce aggregate demand
- B. Increase aggregate demand
- C. Leave national income necessarily unchanged
- D. Reduce the money supply automatically
Explanation
Higher government spending directly adds to aggregate demand when taxes are unchanged. The final rise in national income may be larger or smaller than the initial spending increase depending on the expenditure multiplier and other economic conditions.
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About Public Finance
Government revenue and expenditure are analysed through taxation, public borrowing, budgets, subsidies, transfers and public debt. The topic explains how fiscal policy affects resource allocation, income distribution, economic stability and growth, while distinguishing direct from indirect taxes, progressive from regressive taxation, and public goods from goods supplied by private markets.
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