Question

The change in equilibrium output for an equal amount of change in government expenditure and tax revenue is linked to which one of the following multipliers?

• A. Expenditure multiplier
• B. Balanced Budget multiplier
• C. Lump-sum tax multiplier
• D. Trade multiplier

Hint:

The balanced budget multiplier shows that an equal change in government spending and taxes results in a proportional change in equilibrium output.

Answer 1

The Correct Option is B

Step 1: Understanding the question.
The question is asking about the multiplier effect when there is an equal change in both government expenditure and tax revenue. The balanced budget multiplier refers to the situation where an equal amount of change in government spending and taxes will lead to a change in equilibrium output, typically by the same amount.
Step 2: Explanation of the options.
(A) The expenditure multiplier focuses on changes in government spending but does not consider the effects of tax changes. (B) The balanced budget multiplier shows the effect of an equal change in both government expenditure and tax revenue, resulting in a change in equilibrium output. This is the correct answer. (C) The lump-sum tax multiplier only focuses on changes in taxes, not government expenditure. (D) The trade multiplier is related to trade and export-induced income changes, not changes in government spending and taxes.
Step 3: Conclusion.
The correct answer is (B) because the balanced budget multiplier refers to the situation where an equal change in both government expenditure and tax revenue leads to a change in equilibrium output.