The balanced budget multiplier is equal to

Question

Quizplus · Accepted Answer

The balanced budget multiplier is equal to 1 because when the government increases its spending, it also increases taxes by an equal amount to keep the budget balanced. Therefore, the increase in government spending and the decrease in household disposable income from the higher taxes offset each other resulting in no net change in aggregate demand. However, the initial increase in government spending still generates a level of induced consumption and investment which is equal to the initial increase in government spending, thus resulting in a multiplier of 1.

The Balanced Budget Multiplier Is Equal to