Suppose the government increases both spending and taxes by 100. According to the balanced budget multiplier, which of the following is likely to happen?
A) The equilibrium level of output in the economy will decrease.
B) The marginal propensity to consume will increase.
C) The marginal propensity to consume will decrease.
D) The equilibrium level of output in the economy will increase.

Question

Quizplus · Accepted Answer

The balanced budget multiplier suggests that when the government increases spending and taxes by the same amount, the equilibrium level of output in the economy will increase. This is because the increase in government spending directly increases aggregate demand, while the tax increase does not fully offset this effect due to the marginal propensity to consume being less than 1.

Suppose the Government Increases Both Spending and Taxes by 100