balanced budget multiplier


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Balanced Budget Multiplier

A situation in which a government increases spending and taxes at a rate that keeps its budget in balance. It is thought that some of the money collected in increased taxes comes from what people otherwise would have saved. Because the government then spends the money, spending is increased in the aggregate, which drives economic growth.

balanced budget multiplier

a change in AGGREGATE DEMAND brought about by a change in GOVERNMENT EXPENDITURE, which is exactly matched by a change in revenues received from TAXATION and other sources. The change in government expenditure has an immediate effect on aggregate demand and generates income of an equivalent size. By contrast, the change in taxation does not change aggregate demand by an equivalent amount because some of the increased/reduced DISPOSABLE INCOME will be offset by changes in SAVING.

Consequently, an increase in government expenditure and taxation of equal amounts will have a net expansionary effect on aggregate demand and incomes, while a decrease in government expenditure and taxation of equal amounts will have a net contractionary effect. See BUDGET, FISCAL POLICY.

References in periodicals archive ?
Since the aggregate supply function will play a significant role on evaluating the balanced budget multiplier, we now turn to derive this function in detail.
We are now in a position to reevaluate the balanced budget multiplier.
It indicates that an increase in government expenditures fully covered by taxes will raise the national income, that is, the balanced budget multiplier is positive.
It is obvious from (4) that the specification of the money demand function is crucial for determining whether the balanced budget multiplier will be unity.