The balanced budget multiplier is always equal to:
A)0.5.
B)0.75.
C)1.
D)1.5.
E)1 / MPC.

Question

Quizplus · Accepted Answer

The balanced budget multiplier is equal to 1 because when the government increases its spending and taxes by the same amount, the increase in government spending leads to an increase in aggregate demand and the increase in taxes leads to a decrease in aggregate demand. Since the two effects cancel each other out, the net effect on aggregate demand and therefore on GDP is zero.

The Balanced Budget Multiplier Is Always Equal To