Definition Of Balanced Budget Multiplier

The expansionary effect of a balanced budget is called the balanced budget multiplier henceforth bbm or unit multiplier.

Definition of balanced budget multiplier. Here an increase in government spending matched by an increase in taxes results in a net increase in income by the same amount. Ragan econ 11ce ch22 topic 3 24 04 1 43 pm page 1 clearly have the effect of increasing the equilibrium level of gdp. A balanced budget is a situation in financial planning or the budgeting process where total expected revenues are equal to total planned spending. This is termed a balanced budget multiplier because the change in spending is matched by the change in taxes and thus the government s budget deficit or surplus is neither.

In principles of macroeconomics textbooks the simple balanced budget multiplier is always unity. Balanced budget multiplier the multiplier associated with a change in government spending financed by an equal change in taxes. Balanced budget multiplier a situation in which a government increases spending and taxes at a rate that keeps its budget in balance. Definition of balanced budget multiplier the balanced budget multiplier states that an increase in government spending plus an equal increase in taxes leads to higher output.

In a closed economy a multiplier is equal to one which means that the multiplier effect of a change in tax offsets everything except the initial production that is triggered by a change in government purchases. A note on the simple balanced budget multiplier. This is the essence of bbm. The ratio of the change in aggregate output gdp to a change in government spending which are matched by an equal change in taxes.

It is thought that some of the money collected in increased taxes comes from what people otherwise would have saved. In this case as shown by the algebra in the text the balanced budget multiplier is precisely one that is an x increase in g will result in an x increase in equilibrium gdp and an x increase in net tax revenues. Term balanced budget multiplier definition. The value of the balanced budget multiplier also called the unit budget multiplier is 1 because the tax multiplier is always one less than the autonomous government expenditure multiplier.