Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
An increase in government spending will always lead to a decrease in taxes.
B
A balanced budget increase in spending and taxes can lead to an increase in overall economic output.
C
The spending multiplier is generally larger than the tax multiplier.
D
Increasing taxes without changing government spending will always decrease aggregate demand.
E
The balanced budget multiplier has no effect on unemployment rates.
Understanding the Answer
Let's break down why this is correct
Answer
A balanced budget multiplier refers to the idea that when the government increases its spending by a certain amount and raises taxes by the same amount, the overall effect on the economy can still be positive. This happens because government spending directly adds to the economy, while the taxes taken away do not completely cancel out this effect. For example, if the government spends $100 on a new school and raises taxes by $100, the money spent on the school helps create jobs and stimulates spending in the community, leading to a net positive effect. This means that the overall impact can be greater than just the initial spending or tax increase alone. Therefore, even if the budget is balanced, the multiplier effect can help boost economic activity.
Detailed Explanation
Other options are incorrect because This idea suggests that when the government spends more, taxes must go down; This statement implies that raising both spending and taxes will always boost the economy.
Key Concepts
Balanced Budget Multiplier
Government Spending and Taxation
Aggregate Demand
Topic
Balanced Budget Multiplier Effects
Difficulty
easy level question
Cognitive Level
understand
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