Question

With c = 0.8, suppose the government increases both its expenditure and taxes by 50 each. The change in national income equals:

Options

• 0

• 250

• 50

• 200

Answer 1

The balanced budget multiplier equals 1, so \[\Delta Y = 1 \times 50 = 50\]. The expenditure effect alone is \[5 \times 50 = 250\] and the tax effect is \[-4 \times 50 = -200\]; the net effect \[250 - 200 = 50\] is positive — income rises by exactly the increase in government spending.