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Assume a given economy has an equilibrium GDP of $360 billion. (18 points)

If government spending and taxes both increase by $40 billion, determine the new equilibrium GDP.

If both G and taxes increase by $40 billion, what impact will these two changes happening at the same time have on the budget? In other words, will these two changes cause a surplus, a deficit, or a balanced budget?

Solve for the numerical value of the balanced budget multiplier.

User Vatavale
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Final answer:

An increase in both government spending and taxes by $40 billion, given a balanced budget multiplier, would leave the equilibrium GDP unchanged at $360 billion, resulting in a balanced budget.

Step-by-step explanation:

In a given economy with an equilibrium GDP of $360 billion, if government spending (G) and taxes both increase by $40 billion, the new equilibrium GDP can be determined using the multiplier effect. Since any increase in G tends to increase GDP while a similar increase in taxes tends to reduce it by reducing disposable income, the net effect on equilibrium GDP depends on their relative sizes of multipliers. Here, the balanced budget multiplier is at play, where an increase in G matched by an increase in T leaves the equilibrium GDP unchanged.



If both G and taxes increase by $40 billion, these two changes happening at the same time will result in a balanced budget, assuming there's no initial deficit or surplus. This is because the increase in G will lead to increased spending in the economy, and an equal increase in taxes will provide the funds for this additional government expenditure without needing to borrow externally.



For the numerical value of the balanced budget multiplier, we know that any multiplier above 1 means that the government spending has a greater impact on GDP than changes in taxes. In this example, the multiplier is not provided, and other given information is not immediately applicable to calculate it directly. However, based on the balanced budget multiplier concept, the equilibrium GDP would remain unchanged, and the multiplier in this case would effectively be 1.

User Tieru
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