The government decides to increase its expenditures by $250. The multiplier in this economy is 4 and the tax rate is 22 percent. The net effect of this expansionary fiscal policy is to:

Question

Quizplus · Accepted Answer

The increase in government spending will increase the budget deficit by $250. However, the multiplier effect will also increase the level of output and income in the economy, which will lead to an increase in tax revenue. The increase in tax revenue will be 22 percent of the increase in output and income, which is $250 * 0.22 = $55. Therefore, the net effect of the expansionary fiscal policy will be to increase the budget deficit by $250 - $55 = $195.

The Government Decides to Increase Its Expenditures by $250