In Country Z, the government simultaneously increases its expenditures by $25 billion and increases taxes by $25 billion. If the MPS is equal to 0.2, the government's action ________ real GDP by ________.
A)increases; $125 billion
B)increases; $25 billion
C)increases; $100 billion
D)has no effect on; $0

Question

Quizplus · Accepted Answer

The balanced budget multiplier is always equal to 1. Therefore, an increase in government spending and taxes by the same amount will increase real GDP by the amount of the change in government spending, which is $25 billion.

In Country Z, the Government Simultaneously Increases Its Expenditures by $25