^{Let a small closed economy consist of}^C⁼^a⁺^b^{1 -}^T⁾^{Y, T}⁼^T0^,^{I = I}0^{, and}^G⁼^G0^{. The balanced budget multiplier for a balanced budget increase in} government spending and autonomous taxes is A) 1/[1 - b]. B) -b/[1 - b]. C) 1/[1 + b]. D) -b/[1 + b]. E) 1.

Question

Quizplus · Accepted Answer

The balanced budget multiplier, in the context of a closed economy where government spending and taxes increase by the same amount, is always equal to 1. This is because the increase in government spending directly increases aggregate demand, while the increase in taxes decreases it, but since both are of the same amount, the net effect on aggregate demand is the initial increase in government spending, leading to a multiplier of 1.

Let a Small Closed Economy Consist of C = a

^{Let a Small Closed Economy Consist of}^C⁼^a