Question

25. Which of the following statements is/are correct referring to the balanced budget? a. A balanced budget is one where the change in government spending alone will lead to a change in the level of output and income. Assume that c =0.6. The government increases its spending by 300 and taxes also increase by 300, then the increase in the level of output and income will be 750 due to the increase in government spending and the decrease in the level of output and income will be 450 due to the increase in taxes. The net effect is an increase of 300 in the level of output and income. The net effect of a balanced budget, in other words where tG = T by the same amount, will be expansive. The balanced budget multiplier is equal to one that is for every 1 unit increase in government spending which is matched by a simultaneous 1-unit increase in taxes, the level of output and income will increase by 1-unit.

Question 25

Answer 1

2. Only b, c and d

(In a balanced budget, changes in both the G and T changes output. So, a is not true.
b. Change in income = [1/(1-c)]*Change in G = [1/(1-0.6)]*300 = (1/0.4)*300 = 750
Change in income = [-c/(1-c)]*Change in T = [-0.6/(1-0.6)]*300 = (-0.6/0.4)*300 = -450
So, b is true
Net effect of increase in G and T by same amount will increase income by same amount. So, c is also true.
BBM is always equal to 1. So, d is also true.)