<p>In my understanding you are studying about the balanced budget multiplier. When the government tries to boost GDP by increasing government expenditure (G) and by financing this expenditure by an equal increase in gross taxes collected (T). 
Yes, theoretically such a simultaneous increase in G and T will increase the GDP by an amount equal to the increase in G.</p>

<p>The point to be understood is the functioning of multiplier in the economy. Economy works in a circular flow. Loosely speaking, the income of firms is equal to the consumption of the consumers. When G is increased it goes directly in the economy and gets added in GDP as in a closed economy GDP = C + I + G where C= Consumption by households and I = investment by firms. C depends on GDP and T itself which gives rise to the multiplier affect (taking I and G as independent of GDP) which implies an increase in GDP more than the increase in T.
However, when government increases T, the multiplier effect is not as much strong as T is not a direct component of the GDP. It works by affecting C. 
You can easily understand the mathematics behind it once you look at any standard textbook. </p>

CC BY-SA 3.0
2015-11-28T15:33:43.933Z
2015-11-28T16:25:13.383Z
2015-11-28T16:25:13.383Z
Sub-Optimal
<p>I understand you are focusing on the basic IS model. Then, you are missing the point of the multiplier. When comparing the multiplier for G and the multiplier for T, the former has a bigger impact than the tax one, so the net effect on GDP will be positive.</p>

CC BY-SA 3.0
2015-10-29T13:27:03.463Z
2015-10-29T13:27:03.463Z
Francisco Marco-Serrano
<p>My textbook says GDP will increase because all of the tax money will go into G, whereas only part of income goes into C. However, since savings = investment, wouldn't an increase in taxes (and therefore a reduction in disposable income and savings) decrease I? And so wouldn't a simultaneous increase in both G and T do nothing?</p>

CC BY-SA 3.0
2015-10-29T08:40:30.203Z
Please explain what you're using each initial to denote, the first time you use it.
410 gone
<macroeconomics>
We know that an equal and simultaneous increase in G and T will cause...?
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# We know that an equal and simultaneous increase in G and T will cause...?

(Asked by: username_0 on 2015-10-29)

My textbook says GDP will increase because all of the tax money will go into G, whereas only part of income goes into C. However, since savings = investment, wouldn't an increase in taxes (and therefore a reduction in disposable income and savings) decrease I? And so wouldn't a simultaneous increase in both G and T do nothing?

**Tags:** macroeconomics

> **Comments:**
> **username_1**: Please explain what you're using each initial to denote, the first time you use it.  

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## 2 answers

### Answer by username_2 on 2015-11-28. Score: 1

In my understanding you are studying about the balanced budget multiplier. When the government tries to boost GDP by increasing government expenditure (G) and by financing this expenditure by an equal increase in gross taxes collected (T).
Yes, theoretically such a simultaneous increase in G and T will increase the GDP by an amount equal to the increase in G.

The point to be understood is the functioning of multiplier in the economy. Economy works in a circular flow. Loosely speaking, the income of firms is equal to the consumption of the consumers. When G is increased it goes directly in the economy and gets added in GDP as in a closed economy GDP = C + I + G where C= Consumption by households and I = investment by firms. C depends on GDP and T itself which gives rise to the multiplier affect (taking I and G as independent of GDP) which implies an increase in GDP more than the increase in T.
However, when government increases T, the multiplier effect is not as much strong as T is not a direct component of the GDP. It works by affecting C.
You can easily understand the mathematics behind it once you look at any standard textbook.


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### Answer by username_3 on 2015-10-29. Score: 0

I understand you are focusing on the basic IS model. Then, you are missing the point of the multiplier. When comparing the multiplier for G and the multiplier for T, the former has a bigger impact than the tax one, so the net effect on GDP will be positive.


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