The balanced-budget multiplier

Question

Quizplus · Accepted Answer

The balanced-budget multiplier equals 1. This means that if the government increases its spending and also increases taxes by the same amount, the total change in output will be equal to the initial increase in government spending. This is because the increase in government spending will lead to an increase in income and therefore an increase in consumption, while the increase in taxes will lead to a decrease in income and consumption. The two effects will cancel out, leaving the overall effect on output equal to the initial increase in government spending.

The Balanced-Budget Multiplier