A government decides to increase its spending by $100 million while simultaneously increasing taxes by $100 million. Based on the balanced budget multiplier effects, which of the following outcomes is most accurate regarding the overall impact on economic output?

When a government increases its spending by $100 million and raises taxes by the same amount, the overall impact on economic output is neutral in theory. This is because the balanced budget multiplier suggests that an increase in government spending will lead to a direct increase in economic activity, while the tax increase will generally reduce disposable income and spending by households. However, the initial boost from the government spending can stimulate the economy, leading to more jobs and income, which can have positive ripple effects. For example, if the government spends money on building a new school, it creates jobs for construction workers, who then spend their earnings on local businesses. In this case, while the immediate effect might seem neutral, the spending can lead to a greater overall impact on the economy due to the additional economic activity it generates.