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What is the balanced-budget multiplier? Explain why the balanced-budget multiplier is always equal to 1?

What is the balanced-budget multiplier? Explain why the balanced-budget multiplier is always equal to 1?

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Answer #1
  • Balanced budget multiplier refers to the changes in production due to the government imposed taxes and purchases.
  • It is actually the sum of expenditure multiplier and the tax multiplier or the ratio of the change in GDP to a change in government spending which is equal to the change in taxes.
  • The balanced budget multiplier is always equal to one as the multiplier effect caused by the changes in taxes offsets everything excluding the purchase of aggregate production made by the initial injection.
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