If the government increases both spending and taxes by the same amount, the overall effect on economic output will always be neutral, meaning there will be no change in aggregate demand.

When the government increases spending and taxes by the same amount, it might seem like the total effect on the economy would be neutral, but that’s not always the case. This is because government spending directly adds to the economy, while taxes take money away from consumers. For example, if the government spends $100 on building a park, that money goes to workers and suppliers, boosting their income. However, if it also raises taxes by $100, some people will have less money to spend. The increase in spending can lead to more jobs and income, which can encourage people to spend more, potentially leading to an overall increase in economic activity despite the tax hike.