"As long as supply-side effects are ignored, the balanced budget multiplier is equal to zero." Is the previous statement correct or incorrect? Define the balanced budget multiplier and then explain your answer

What will be an ideal response?

The statement is incorrect because, even ignoring any supply-side effects, the balanced budget multiplier is greater than zero. The balanced budget multiplier shows the effect on aggregate demand from a simultaneous change in government expenditure and taxes that leaves the budget balance unchanged. (Say, for instance, a simultaneous increase in government expenditures of $50 billion is balanced by a simultaneous increase in tax receipts of $50 billion.) Why is the balanced budget multiplier greater than zero? Suppose the government increases its expenditure and taxes by the same amount, say $50 billion. The $50 billion tax increase decreases aggregate demand while the $50 billion increase in government expenditure increases aggregate demand. The balanced budget multiplier gives the net effect on aggregate demand. And, the increase in aggregate demand from the increase in government expenditure is greater than the decrease in aggregate demand from the increase in taxes. So on net aggregate demand increases and the amount of the increase is given by the balanced budget multiplier.