Question

2. If there is an increase in taxes of $1000, then how is the equilibrium GDP...

2. If there is an increase in taxes of $1000, then how is the equilibrium GDP in this economy affected?
a. equilibrium GDP increases by $3000
b. equilibrium GDP decreases by $3000

c. equilibrium GDP increases by $4000 d. equilibrium GDP decreases by $4000 e. none of the above

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Answer #1

The equilibrium GDP attained when (Income = Expenditure). And here given that increase in taxes this means it will reduce disposable income of individual,this ultimatelty leads to disturbance in equilibrium in GDP. Here we need to understand one concept which is tax multiplier .

Tax Multiplier = the tax multiplier tells us the final increase in GDP that will occur as the result of a change in taxes.

Here in given question we didn't have any information about tax multiplier than we can not say anything about equilibrium GDP hence answer is (E)

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