Balanced Budget Multiplier

Discipline: Economics

Balanced budget multiplier is first developed by Jørgen Henrik Gelting in 1941, and then by Norwegian economist Trygve Haavelmo (1911-1999) in 1945.

Balanced budget multiplier holds that if government revenues and expenditure increase or decrease simultaneously and equally, then national income will also change in the same amount - which means that the balanced budget multiplier equals to 1.

The reason behind the equal amount of change in national income is the opposite effect of the equal changes in the government revenues and expenditures.

The balanced budget multiplier is important in understanding the way governments manage the economy.

Also see: balanced budget, equilibrium theory, multiplier, multiplier-accelerator, partial equilibrium theory


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