The correct option is 1 and 3 only.
Explanation
The Balanced Budget Multiplier is a macroeconomic concept analyzing the impact on aggregate output (income) when government spending and tax revenue change by the same amount. It illustrates the net effect of simultaneous fiscal expansion (spending) and contraction (taxation) on the economy.
Statement-wise Analysis:
- Statement 1 is Correct: An increase in government spending matched by an equal increase in taxes results in a net increase in national income. This happens because government spending increases aggregate demand directly by the full amount, whereas taxes reduce aggregate demand indirectly by reducing disposable income. Since households pay taxes partly from savings and partly from consumption (based on the Marginal Propensity to Consume), the reduction in demand due to taxes is less than the increase in demand due to spending.
- Statement 2 is Incorrect: The value of the balanced budget multiplier is not zero; it is equal to unity (1) in a simple Keynesian model. This indicates that a balanced budget expansion is not neutral but expansionary.
- Statement 3 is Correct: Because the multiplier value is 1, the change in aggregate output ($\Delta Y$) is exactly equal to the initial change in government spending ($\Delta G$). For instance, if spending and taxes both increase by ₹100 crore, the total income of the economy increases by exactly ₹100 crore.
Key Takeaway:
The Balanced Budget Multiplier is equal to 1 (Unity). This implies that fiscal policy can stimulate the economy and increase output even without incurring a fiscal deficit, provided both spending and taxes are raised equally.