![]() ![]() Because households spend their money on consumption and savings, MPC + MPS = 1, both MPS and MPC are less than one. The opposite is the marginal tendency to save (MPS), the part of extra disposable income saved. To answer that, let us recall the concept of marginal propensity to consume (MPC), which refers to the portion of the additional disposable income allocated to the consumption of goods and services. After implementation, the expansion effect of an increase in government spending is stronger than the contraction effect of an increase in taxes. Say, the government increases spending and taxes at an equal rate. When the government plans ∆T = ∆G, the initial budget position does not change (remained deficit or surplus). ![]() The net effect: changes in expenditure will be more significant than the impact of changes in tax Meanwhile, tax changes have a negative correlation. Thus, changes in government spending (∆G) positively correlates with aggregate output. Conversely, when taxes go down, it will stimulate aggregate output. In contrast, increasing taxes reduces aggregate demand in the economy. The opposite effect applies when the government decreases spending. When spending rises, aggregate demand increases, stimulating increased production in the economy. When the government increases spending, it will increase aggregate output (measured by GDP). The effect of changes in government spending and taxes on aggregate output ![]() So, the budget surplus is unchanged, at Rp100. At the same time, the government also raises taxes by Rp200, from Rp700 to Rp900. For example, the government increases spending by Rp200, from Rp600 to Rp800. It measures changes in aggregate output as a result of changes in government spending and taxes at an equivalent rate.īecause changes in spending are adjusted to changes in taxes at an equivalent rate, the government keeps the budget deficit or surplus unchanged. The budget multiplier is a combination of the effects of the expenditure multiplier and tax multiplier. So, when doing so, the government may run a budget deficit or a budget surplus How the balanced budget multiplier works However, the word “balanced” refers to changes in expenditure that are equivalent to changes in taxes. ![]() The shift also shrinks trade deficits and helps the economy grow faster in the long run.Ī balanced budget multiplier does not mean that it occurs when the government implements a balanced budget, where government revenue equals expenditure. Some economists argue that switching from a budget deficit to a balanced budget contributes positively to lower interest rates and increase investment. Conversely, spending smaller than income means a surplus. Spending that is greater than income means a deficit. Because most of the government revenue comes from taxes, many economists write them down as tax revenue equals expenditure. So, if the bank lends one rupiah and circulates in the economy, it will become Rp20.Ī balanced budget means revenue equals expenditure. When the central bank reduces the reserve requirement ratio, say from 10% to 5%, it will multiply the money supply in the economy by 20 = 1/5%. For example, in a fiscal multiplier, government spending increases X times it will increase aggregate output more than X times.Īnother example is the money multiplier. In economics, multiplier means, when a factor changes, it influences other economic variables more broadly. A brief definition: a multiplier and a balanced budget ![]()
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