The change in equilibrium output that results from a unit increase or…

The correct answer is Option (1) → Balanced budget multiplier

Suppose the government raises its spending and, to keep the budget balanced, raises taxes by the same amount. The spending pushes output up, the tax pushes it down by cutting consumption, and the two pushes are not equal. The change in equilibrium output from such an equal change in both taxes and government spending is the balanced budget multiplier, and its value is 1:

• The extra spending raises output through the government expenditure multiplier, 1/(1 − c).

• The extra tax lowers disposable income and so consumption, and lowers output through the tax multiplier, −c/(1 − c), which is always one less in absolute value.

• Adding the two: ΔY/ΔG = 1/(1 − c) − c/(1 − c) = (1 − c)/(1 − c) = 1

So output rises by the full amount of the increase in government spending.

Why the other options are incorrect

• Option (2) Balanced budget — Incorrect. A balanced budget is one in which government receipts equal government expenditure. It describes the budget, not the change in output.

• Option (3) Balance of payments — Incorrect. The balance of payments is the record of a country’s transactions with the rest of the world.

• Option (4) Balance of trade — Incorrect. The balance of trade is the value of exports less the value of imports of goods.