The multiplier for a balanced budget increase in government purchases, where government purchases and taxes increase by the same amount, is 1.

Here's why:

1. When government purchases increase, it increases aggregate demand, which leads to an increase in output and income.

2. The increase in income leads to an increase in consumption. The marginal propensity to consume (MPC) is the fraction of the increase in income that is consumed.

3. However, the increase in taxes reduces disposable income and thus reduces consumption.

4. Because the increase in government purchases and taxes are the same amount, the increase in consumption from the increase in income is exactly offset by the decrease in consumption from the increase in taxes.

5. Therefore, the net effect on aggregate demand is just the initial increase in government purchases, and the multiplier is 1.

So, the correct answer is: 1.

Question

The multiplier for a balanced budget increase in government purchases, where government purchases and taxes increase by the same amount, is 1.

Here's why:

1. When government purchases increase, it increases aggregate demand, which leads to an increase in output and income.

2. The increase in income leads to an increase in consumption. The marginal propensity to consume (MPC) is the fraction of the increase in income that is consumed.

3. However, the increase in taxes reduces disposable income and thus reduces consumption.

4. Because the increase in government purchases and taxes are the same amount, the increase in consumption from the increase in income is exactly offset by the decrease in consumption from the increase in taxes.

5. Therefore, the net effect on aggregate demand is just the initial increase in government purchases, and the multiplier is 1.

So, the correct answer is: 1.

Knowee AI · Accepted Answer

The multiplier for a balanced budget increase in government purchases, where government purchases and taxes increase by the same amount, is 1.

Here's why:

1. When government purchases increase, it increases aggregate demand, which leads to an increase in output and income.

2. The increase in income leads to an increase in consumption. The marginal propensity to consume (MPC) is the fraction of the increase in income that is consumed.

3. However, the increase in taxes reduces disposable income and thus reduces consumption.

4. Because the increase in government purchases and taxes are the same amount, the increase in consumption from the increase in income is exactly offset by the decrease in consumption from the increase in taxes.

5. Therefore, the net effect on aggregate demand is just the initial increase in government purchases, and the multiplier is 1.

So, the correct answer is: 1.

Suppose that both government purchases and taxes increase by the same amount. The multiplier for this "balanced budget" increase in government purchases is:1 / (1 − MPC).1.−MPC / (1 − MPC).MPC2 / (1 − MPC).

Question

Solution

Similar Questions

Upgrade your grade with Knowee