If government spending and taxes both increase by the same amount in a simple Keynesian model, the balanced-budget multiplier is generally:
Correct answer: C. Equal to one
- A. Zero
- B. Less than zero
- C. Equal to one
- D. Greater than two
Explanation
In the simple model, an equal increase in government spending and taxes raises aggregate income by the amount of the spending increase. Thus, the balanced-budget multiplier is one, subject to the model's simplifying assumptions.
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Government revenue and expenditure are analysed through taxation, public borrowing, budgets, subsidies, transfers and public debt. The topic explains how fiscal policy affects resource allocation, income distribution, economic stability and growth, while distinguishing direct from indirect taxes, progressive from regressive taxation, and public goods from goods supplied by private markets.
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