If government expenditure is increased by Rs. 700 and tax is also increased by Rs. 700 then the equilibrium level of income:

The correct answer is: C. Will no change.

Government expenditure is a component of aggregate demand, while tax is a component of aggregate supply. When government expenditure increases, aggregate demand increases. When tax increases, aggregate supply decreases. If government expenditure increases by Rs. 700 and tax is also increased by Rs. 700, then the net effect on aggregate demand and aggregate supply is zero. Therefore, the equilibrium level of income will not change.

Here is a more detailed explanation of each option:

• Option A: Rs. 700 will decrease. This is incorrect because the equilibrium level of income will not decrease.
• Option B: Rs. 700 will increase. This is incorrect because the equilibrium level of income will not increase.
• Option C: Will no change. This is the correct answer because the net effect of an increase in government expenditure and an increase in tax is zero.
• Option D: Will increase by Rs. 1400. This is incorrect because the equilibrium level of income will not increase by Rs. 1400.