The balanced-budget multiplier works whenever the government increases spending and increases taxes by the same amount.

Question

Quizplus · Accepted Answer

The balanced-budget multiplier suggests that an equal increase in government spending and taxes will lead to an increase in aggregate demand and thus in the overall level of output, because the spending directly increases demand while the tax increase does not fully offset this due to the marginal propensity to consume being less than one.

The Balanced-Budget Multiplier Works Whenever the Government Increases Spending and Increases