Question

The balanced-budget multiplier is a measure of the short-run change in aggregate output caused by equal changes in government purchases and taxes. Ignoring any supply-side or long-run effects, if the government simultaneously increases both taxes and government spending by $100 billion, what is the expected short-run impact on GDP? Group of answer choices GDP does not change. GDP increases by less than $100B. GDP decreases by less than $100B. GDP increases by $100B. GDP decreases by $100B.

Answer 1

Answer: GDP increases by $100B

Explanation:

The Balanced Budget Multiplier is used to.measure the effect of a simultaneous increase in Government Spending and Taxes on the Economy.

While Classical Theorists believed that they cancel each other out, Keynesian Economists went about proving that this was not the case.

They showed that an increase in Government Spending had a ripple effect that was not curtailed by increasing taxes.

What they found out was that, increasing Government Spending at the same rate as taxes led to a rise in National income that was the same as the amount that Government Spending increased by.

This means that an increase in Government Spending and tax of $100 billion will lead to an increase in Income of $100 billion as well which will be translated into the GDP.