How a balance budget multiplier is used? - Answers

The balanced budget multiplier is used to analyze the impact of simultaneous changes in government spending and taxes on the overall economy. When the government increases its spending while raising taxes by the same amount, the balanced budget multiplier suggests that the overall economic output will increase. This occurs because the increase in government spending directly contributes to aggregate demand, while the tax increase only partially offsets this effect. Thus, the balanced budget multiplier is typically greater than one, indicating that such fiscal policy can stimulate economic activity despite being budget-neutral.