Question

I think the correct answer is B., but I just want to make sure! Equal increases...

I think the correct answer is B., but I just want to make sure!

Equal increases in government purchases and taxes will:

A. increase the equilibrium GDP and the size of that increase varies directly with the size of the MPC.

B. increase the equilibrium GDP and the size of that increase is independent of the size of the MPC.

C. increase the equilibrium GDP and the size of that increase varies inversely with the size of the MPC.

D. decrease the equilibrium GDP and the size of that decrease is independent of the size of the MPC.

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Answer #1

Option B

B. increase the equilibrium GDP and the size of that increase is independent of the size of the MPC.

The equal increase in government spending and taxes is called balance budget expansionary policy which increases the real output maximum by the same amount which the taxes and government spending is changed. It is called the balanced budget multiplier and it is 1.

As the tax multiplier and spending multiplier has a difference of 1 in absolute value.

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