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      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 Ξ”G = Ξ”T, then Ξ”Y = 1 * Ξ”G. The multiplier is unity.

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