The balanced-budget multiplier is generally equal to one when the government increases spending and taxes by the same amount because
Correct answer: B. The direct spending effect exceeds the negative consumption effect
- A. The tax multiplier is larger than the spending multiplier
- B. The direct spending effect exceeds the negative consumption effect
- C. Taxes have no effect on household income
- D. Government spending is excluded from aggregate demand
Explanation
An equal rise in spending and taxes raises aggregate demand by the balanced-budget multiplier, which is one in the simple Keynesian model. Government spending has a direct effect, while higher taxes reduce consumption only partly because households do not spend all of their income.
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The economy is studied as a whole through national income, gross domestic product, inflation, unemployment, economic growth and business cycles. Coverage includes aggregate demand and supply, consumption and investment, money and banking, fiscal and monetary policy, exchange rates and balance of payments, which distinguishes macroeconomics from the study of individual markets.
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