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An Increase in Government Spending Δ\Delta G That Is Paid for by an Identical Increase in for by an Identical

Question 63

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An increase in government spending Δ\Delta G that is paid for by an identical increase in taxes increases equilibrium output by Δ\Delta Gm regardless of the mpc. Prove.
The decrease in expenditure due to the tax increase is mpc x Δ\Delta G (some comes out of savings), so the total increase in expenditures is Δ\Delta G - mpc x Δ\Delta G = (1 - mpc) Δ\Delta G. The total change in equilibrium output is m(1 - mpc) Δ\Delta G where m is the multiplier, but m = 1/(1 - mpc) so the total change is Δ\Delta G.

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