Question

Impact of changes in goverenment expenditure and taxes

Answer 1

Answer:

However, it is possible increased spending and tax rises could lead to an increase in GDP. In a recession, consumers may reduce spending leading to an increase in private sector saving. Therefore a rise in taxes may not reduce spending as much as usual. The increased government spending may create a multiplier effect.

Taxes finance government spending; therefore, an increase in government spending increases the tax burden on citizens—either now or in the future—which leads to a reduction in private spending and investment. This effect is known as "crowding out."

Explanation:

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