Government
Spending
Government
expenditures are a component of GDP, and are directly accounted for in its
calculation. Government spending increases aggregate demand, and
government taxes
lower aggregate demand
Balanced-budget
Multiplier
-
Equal increases in government spending and taxation increase the equilibrium GDP by the same amount as the initial increase.
-
For example, if government spending is increased by $20 million and taxes are increased by $20 million, aggregate demand will increase by $20 million.
-
Equal increases in government spending and taxation increase the equilibrium GDP by the same amount as the initial increase.
-
For example, if government spending is increased by $20 million and taxes are increased by $20 million, aggregate demand will increase by $20 million.
-
Rationale: Government spending has a direct impact on aggregate expenditures. Taxes have an indirect effect aggregate expenditures, and it must be multiplied by MPC first before it is subtracted from aggregate expenditures.
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Because equal increases in G and T expand GDP by an amount equal to that increase, the balanced budget multiplier is always 1. NOTE this is a special case of the multiplier.
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