Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It increases overall economic output by the amount of the government spending.
B
It has no effect on overall economic output.
C
It decreases overall economic output.
D
It increases taxes without impacting spending.
Understanding the Answer
Let's break down why this is correct
Answer
A balanced budget means that a government spends the same amount of money it earns from taxes, which can have a unique effect on the economy. According to the balanced budget multiplier concept, when the government increases its spending and raises taxes by the same amount, it can still boost the overall economic activity. This happens because government spending directly creates jobs and drives demand for goods and services, while the tax increase might not reduce consumption as much. For example, if the government decides to spend an extra $100 million on building roads and raises taxes by the same amount, the jobs created and the money spent on materials can lead to more economic activity, helping local businesses. In this way, even though the budget is balanced, the economy can still benefit from the government's spending.
Detailed Explanation
When the government spends money and balances its budget, it can boost the economy. Other options are incorrect because Some might think that balanced budgets do nothing; It's a common mistake to believe that spending less is always better.
Key Concepts
balanced budget multiplier
Topic
Balanced Budget Multiplier Effects
Difficulty
easy level question
Cognitive Level
understand
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