The balanced budget multiplier states that an increase in government spending, plus an equal increase in taxes, will leave the equilibrium output unchanged.

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The balanced budget multiplier states that an increase in government spending, financed by an equal increase in taxes, will increase the equilibrium output, not leave it unchanged. This is because the increase in government spending directly increases aggregate demand, while the tax increase primarily affects disposable income and consumption, with the former having a more immediate and direct impact on aggregate demand than the latter.

The Balanced Budget Multiplier States That an Increase in Government