Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Economic output increases due to the spending multiplier effect
B
Economic output decreases because higher taxes reduce consumption
C
There is no change in economic output as spending and taxes offset each other
D
Economic output decreases because government spending always leads to inefficiency
Understanding the Answer
Let's break down why this is correct
Answer
When the government increases spending and taxes by the same amount, the overall impact on economic output can be somewhat neutral. This is because the increase in government spending puts more money into the economy, which can boost demand for goods and services. However, the increase in taxes takes money away from people, which can reduce their spending power. For example, if the government spends an extra $100 million on infrastructure but also raises taxes by $100 million, the immediate effect might not change the total economic activity much because the extra spending is offset by the higher taxes. In this case, the balanced budget multiplier suggests that the overall output could remain stable, showing that the effects of spending and taxes can balance each other out.
Detailed Explanation
When the government spends money, it creates jobs and boosts demand. Other options are incorrect because Some might think that higher taxes always hurt spending; It's a common belief that spending and taxes cancel each other out.
Key Concepts
Balanced Budget Multiplier
Government Spending and Taxes
Aggregate Demand
Topic
Balanced Budget Multiplier Effects
Difficulty
medium level question
Cognitive Level
understand
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