Question

The balanced budget multiplier is

Select one:

a. equal to zero.

b. positive because the magnitude of government expenditure multiplier is smaller than the magnitude of tax multiplier.

c. negative because the magnitude of the tax multiplier is larger than the magnitude of the government expenditure multiplier.

d. positive because the magnitude of government expenditure multiplier is larger than the magnitude of tax multiplier.

e. negative because the magnitude of government expenditure multiplier is larger than the magnitude of the tax multiplier.

Answer 1

Option D

• Balanced budget refers to the change in government Expenditure with respect to change in taxes.
• The Balanced budget multiplier is positive because the magnitude of government Expenditure multiplier is larger than the magnitude of tax multiplier.
• This is because when the income is taxed, people usually save some portion of their income rather than consuming it and we know that GDP does not include savings.
• Thus the magnitude of government Expenditure exceeds the tax multiplier which makes the balanced budget multiplier positive.