Question

    The "Balanced Budget Multiplier" states that if the

    government increases expenditure and taxes by the same amount, the net effect on national income is:
    A Zero Correct Answer Incorrect Answer
    B Positive and equal to the change in government spending. Correct Answer Incorrect Answer
    C Positive but less than the change in government spending. Correct Answer Incorrect Answer
    D Negative. Correct Answer Incorrect Answer
    E Infinite. Correct Answer Incorrect Answer

    Solution

    The multiplier for government spending (G) is 1/(1-MPC). The multiplier for taxes (T) is -MPC/(1-MPC). The net effect is (1/(1-MPC)) + (-MPC/(1-MPC)) = (1-MPC)/(1-MPC) = 1. So, if ΔG = ΔT, then ΔY = 1 * ΔG. The multiplier is unity.

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