Question

According to the balanced budget multiplier, an increase in government spending of $10,000 that is financed by an increase of $10,000 in taxes will have what effect on the economy when MPC is 0.80?
a. Income will not change.
b. Income will increase by $8,000.
c. Income will increase by $50,000.
d. Income will increase by $10,000.

Answer 1

Answer:

D) Income will increase by $10,000.

Explanation:

The balanced budget multiplier measures the change in aggregate output when government spending increases by increasing taxes. The formula for determining the balanced budget multiplier is by adding government expenditures multiplier and the tax multiplier. The balanced budget multiplier is always equal to one, therefore the net change in aggregate production (income) is equal to the increase in government spending.