If transfer payments and autonomous taxes both increase by identical amounts,
A)equilibrium income will increase by the amount of the increase
B)equilibrium income will increase by more than the increase
C)equilibrium income will increase by less than the increase
D)the change in equilibrium income will depend on the value of the MPC
E)there will be no change in equilibrium income

Question

Quizplus · Accepted Answer

If transfer payments and autonomous taxes increase by identical amounts, then there will be no net effect on aggregate demand, and therefore no change in equilibrium income. Transfer payments increase disposable income, which increases consumption, but the increase in autonomous taxes reduces disposable income, which reduces consumption by the same amount. Thus, the two effects offset each other, leading to no change in equilibrium income.

If Transfer Payments and Autonomous Taxes Both Increase by Identical