Economics • Economic BasicsHard
What does the 'Balanced Budget Multiplier', also known as the Haavelmo Theorem, state in Keynesian macroeconomic theory?
A. An equal increase in government spending and lump-sum taxes has a multiplier effect of zero on national income
B. An equal increase in government expenditure and lump-sum taxes expands national income by exactly the amount of the increase✓ Correct Answer
C. Balanced budgets lead to hyperinflation when the economy operates at full employment capacity
D. Government borrowing crowds out private investment by an equivalent monetary magnitude
💡 Solution & Explanation
The Haavelmo Theorem proves that if government purchases and lump-sum taxes increase by the exact same amount, the multiplier equals one, raising aggregate income by that exact sum. This occurs because government spending enters the income stream directly with full force, whereas taxes reduce disposable income by a fraction determined by the marginal propensity to consume. Fiscal policy remains expansionary even under balanced budget conditions due to this differential impact.
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