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Nilanjan Bhowmick AIR 3, CSIR NET (Earth Science)
- UGC NET
- Economics
64. according to keynesian analysis, il government expendiure and taxes are incree sed by the same amount which of the following will occur ( aggregate demand w
64. According to Keynesian analysis, il government expendiure and taxes are incree sed by the same amount which of the following will occur ( Aggregate demand will increase (2) A EEregate demand will remain constant (3 Aggregate demand will fall (4) ABgregate supply will increase
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Nidhi taparia Best Answer
Option (1) is right. This is the concept of Balanced Budget Multiplier. Balanced budget means the government increases its expenditure as much as it increases the taxes. The effect of this is an increase in AD as much as the expenditure is increased. Classical economists believed that a balanced budget is neutral in the sense that the levels of output or income remain unchanged. However, Keynes and his followers argued that, in reality, its effect on income will not be zero or neutral. In other words, we can find out the expansionary effect on national income of a balanced budget. The expansionary effect of a balanced budget is called the balanced budget multiplier (henceforth BBM) or unit multiplier. Here an increase in government spending matched by an increase in taxes results in a net increase in income by the same amount.