In Country X, the government simultaneously increases its expenditures by $100 billion and increases taxes by $100 billion. If the MPS is equal to 0.4, the government's action ________ real GDP by ________.
A) increases; $250 billion
B) decreases; $250 billion
C) increases; $100 billion
D) has no effect on; $0

Question

Quizplus · Accepted Answer

The balanced budget multiplier is equal to 1, meaning that an equal increase in government spending and taxes will increase real GDP by the amount of the change in government spending, which is $100 billion in this case.

In Country X, the Government Simultaneously Increases Its Expenditures by $100