Balanced Budget Multiplier
Having worked out the government expenditure multiplier and taxes multiplier we can now work out the combined effect of change in government expenditure and taxes on the equilibrium level of income. We have seen that the change in the equilibrium level of income due to change in government expenditure is equal to (1/(1-b))?G. on the other hand, the change in the equilibrium level of income due to change in taxes is given by (-b/(1-b))?T. to determine the resulting change in income due to change in income due to change in G and T, we need to add (1/(1-b))?G to (-b/(1-b))?T, that is
Now, suppose that the change in government spending is matched by an equal change in taxes (i.e., ?G = ?T, a balanced budget) what would be the resulting change in the equilibrium level of income?
Putting ?G = ?T in equation, we get
This implies that when government expenditure and taxes are increase by equal amount, the resulting increase in income is exactly to the increase in government expenditure. The multiplier is equal to 1. This multiplier is called the balanced budget multiplier.
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