The balanced-budget multiplier is equal to
A)the percentage increase in government expenditures.
B)the reciprocal of the increase in government expenditures.
C)the percentage increase in taxes.
D)1.

Question

Quizplus · Accepted Answer

The balanced-budget multiplier is equal to 1, which means that when the government increases spending and increases taxes by the same amount, the overall effect on the economy will be neutral. This is because the increase in government spending will increase aggregate demand, but the increase in taxes will decrease disposable income and reduce aggregate demand by the same amount. Therefore, the net effect on the economy will be zero.

The Balanced-Budget Multiplier Is Equal to