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Derive the balanced budget multiplier

Derive the balanced budget multiplier

Answers

Dana
Increase in equilibrium income due to an increase in government expenditure in a closed economy is given by
?Y/?G = ?G/ (1 – ß)
The fall in equilibrium income due to an increase in lump sum taxation to meet revenue needs of increase in government expenditure is
?Y/?T = - ß?T / (1 – ß)
If taxes and government spending change simultaneously the combined effect on income is given by
?Y/?G = ?G/ (1 – ß) - ß?T / (1 – ß)
If the government maintains a balanced budget it means
?G = ?T
?Y/?G = ?G/ (1 – ß) - ?G / (1 – ß)
(1-ß) / (1-ß) ?G = ?G
Therefore the balanced budget multiplier is 1
Dana05 answered the question on July 18, 2019 at 20:00

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