balanced budget multiplier

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The effect on the gross national product caused by a change in government expenditure that has been offset by an equal change in taxation. For example, an increase in government spending will inject more demand into the economy than the equal increase in taxation takes out, since some of the income absorbed by the tax would have been used for savings and therefore did not contribute to the aggregate demand. In effect, individuals have reduced savings, they feel worse off, and therefore work harder to build up their savings again. The balanced-budget multiplier is not usually pursued explicitly as an instrument of fiscal policy as taxation is generally unpopular.

In traditional Keynesian goods-sector models the BBM will equal one. In other words, the change in gross national product is equal to the change in government expenditure or the change in taxation, i.e.:

BBM = ΔYΔG = 1,

where ΔG is the change in government expenditure and ΔY is the change in gross national product.

Subjects: Financial Institutions and Services.

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