Discussion
Balanced Budget Multiplier works only if :
Answer: A
The key's answer is that transfer payments are zero.
The balanced budget theorem compares an increase in government purchases of goods and services with an equal increase in taxes. Purchases add to demand in full, while the tax reduces consumption by only the MPC times the tax, so income rises by the amount of the spending.
If the extra spending took the form of transfer payments instead, it would raise demand only through recipients' consumption, by the MPC times the transfer, which exactly offsets the effect of the equal tax, and income would not rise at all. So the unit multiplier depends on the spending being on goods and services, with no transfer element. The other options are not conditions of the theorem.
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