A simultaneous increase of government purchases by $50 billion and a tax hike of $50 billion should stimulate the economy by $50 billion.
The balanced budget multiplier is equal to 1.In this case,a $50 billion increase in annual government expenditure combined with an equivalent increase in taxes increases aggregate demand by $50 billion per year.When government spending increases by $50 billion,the initial spending injection will $50 billion; the remainder of taxpayers' payments will come from savings.Accordingly,the increase in AD will be $50 billion when one uses the balanced budget multiplier.

Question

Quizplus · Accepted Answer

The balanced budget multiplier is indeed equal to 1, meaning that an equal increase in government spending and taxes will result in an increase in aggregate demand equal to the amount of the spending increase.

A Simultaneous Increase of Government Purchases by $50 Billion and a Tax