Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It has no effect on GDP
B
It leads to a larger increase in GDP than the initial spending amount
C
It results in a decrease in GDP
D
It produces an increase in GDP equal to the amount of the fiscal stimulus
Understanding the Answer
Let's break down why this is correct
Answer
A balanced budget fiscal stimulus means that the government increases its spending and raises taxes by the same amount, so the budget stays balanced. This can still have a positive effect on the economy because of the multiplier effect, which is the idea that spending creates more spending. For example, if the government spends $100 on building roads, the workers who build those roads will earn money and spend some of it on things like food and clothes. This spending helps businesses grow and may lead to more jobs, which means even more spending in the economy. Overall, even though the budget stays balanced, the initial spending can lead to a larger increase in overall economic activity.
Detailed Explanation
A balanced budget fiscal stimulus means the government spends money while also raising the same amount in taxes. Other options are incorrect because Some might think that a balanced budget does nothing; It's a common mistake to think that spending less leads to a decrease in GDP.
Key Concepts
multiplier effect
fiscal stimulus
Topic
Balanced Budget Multiplier Effects
Difficulty
medium level question
Cognitive Level
understand
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