Explain why the balanced budget multiplier is equal

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Explain why the balanced budget multiplier is equal to one (i.e., if government spending increases by 10 billion and taxes increase by 10 billion, equilibrium GDP increases by 10 billion). In your explanation, you may assume that the increase in government spending (ΔG) is 10 billion, the corresponding increase in taxes (ΔT) is 10 billion, and the Marginal Propensity to Consume (MPC) is equal to 0.8. What would provide more stimuli, a 10 billion dollar increase in government spending or a 10 billion dollar tax cut?

Reference no: EM131169587

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