If government increases its tax revenues, what will happen to equilibrium GDP?
The question is fundamentally misguided. 1. As the GDP grows, so do tax revenues, so the increase in tax revenues per se, means nothing. 2. What is the government going to do with its tax revenues except to spend it one way or another? That contributes to GDP. If the additional revenues are used for transfers, then the result could be an even higher equilibrium GDP. 3. If and only if you add the proviso that the government spending doesn’t change as a result of additional revenue, and that savings are never used for investment, and that you are talking about two parallel hypotheticals rather than reality (i.e. what happens in real life), etc. then the question sort of makes sense. The basic idea is that if you were to directly increase people’s income by X, then they would spend X * MPC and save (1 – MPC) * X. This translates, through the spending multiplier http://en.wikipedia.org/wiki/Fiscal_mult… into a tota
