A tax increase of $250 will exactly offset a $250 increase in government purchases, leaving aggregate demand unaffected.
Answer the following statement true (T) or false (F)
False
When government spending increases by $250, the initial spending injection will be $250. The decrease in consumption due to a $250 tax increase will be less than $250; the remainder of taxpayer's payment will come from savings. Accordingly, the change in AD will be $250 when one uses the balanced budget multiplier.
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