Question

The balanced budget multiplier is O A. greater than zero and less than the O B. greater than zero and greater than the government expenditure multiplier ° C. equal to zero because taxes and government expenditure are changed to leave the budget balanced 0 D. misnamed because it does not leave the budget balanced O E. less than zero, that is, it is negative gpoverment expenditure multiplier Click to select your answer Type here to

Answer 1

MPS is marginal propensity to save.

MPC is marginal propensity to consume.

Government spending multiplier= 1\mps

Tax multiplier=- mpc\mps

When change in government spending and change in the tax receipt are equal, then budget will be balanced.

Balanced budget multiplier=government spending multiplier+ tax multiplier

=1\mps+(-mpc\mps)

=(1-mpc)\mps

=mps\mps

=1

Hence balanced budget multiplier will be equal to 1.

Since MPS is always less than 1. Hence government spending multiplier will always greater than 1.

It means balanced budget multiplier will be greater than zero but less than government spending multiplier.

Hence option A is the correct answer.