According to the balanced budget multiplier, an increase in government spending of $10,000 that is financed by an increase of $10,000 in taxes will have what effect on the economy when MPC is 0.80?
A) Income will not change.
B) Income will increase by $8,000.
C) Income will increase by $10,000.
D) Income will increase by $50,000.

Question

Quizplus · Accepted Answer

The balanced budget multiplier is always equal to 1, meaning that an equal increase in government spending and taxes will increase income by the amount of the spending. Thus, income will increase by $10,000.

According to the Balanced Budget Multiplier, an Increase in Government