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Goods market: Balanced budget multiplier

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Published on Feb 27, 2012

In this Keynesian goods market model the balanced budget multiplier indicates that an equal change in government spending (G) and taxes (T), which leaves the budget unchanged, still have an impact on the level of output and income (Y). If an increase in G = an increase in T it has an expansionary impact on Y equal to the initial increase. If G increases with 200 and T increases with 200 then Y increases with 200.

An increase of 200 in government spending shifts the demand for goods curve upwards by 200. An increase in taxes of 200 shifts the demand for goods curve downwards by 8.0(200) =160. The net effect on autonomous spending is an increase of 40 and output and income increases by 200.

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