Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It increases aggregate demand by the full amount of the spending increase.
B
It has no effect on aggregate demand.
C
It decreases aggregate demand by the amount of the tax increase.
D
It increases aggregate demand by a factor less than the spending increase.
Understanding the Answer
Let's break down why this is correct
Answer
When the government increases its balanced budget, it means that it is spending more money while also increasing its income, usually through taxes. This can lead to an increase in aggregate demand, which is the total amount of goods and services that people want to buy in the economy. For example, if the government builds a new school, it spends money on construction and pays workers, who then have more money to spend on things like food and clothes. This extra spending by the workers can encourage businesses to produce more, creating a cycle of increased demand. Overall, a balanced budget increase can stimulate the economy by encouraging more spending without increasing the overall debt.
Detailed Explanation
When the government spends more money, it directly boosts demand. Other options are incorrect because Some might think that spending doesn't change demand at all; This option suggests that spending less leads to lower demand.
Key Concepts
fiscal policy
Topic
Balanced Budget Multiplier Effects
Difficulty
easy level question
Cognitive Level
understand
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