Consider a Closed Economy in Which Consumption Is Described by

question 6

Multiple Choice

Consider a closed economy in which consumption is described by
C = 200 + 0.81 - t) Y. Let the tax rate t = 0.2 and I = 800, and assume an active government so that G = 1,200. If the government balances its budget in equilibrium by increasing the tax rate and decreasing its spending, then

• A) GDP climbs above $5,556.
• B) GDP remains at $5,556.
• C) GDP falls below $5,556.
• D) GDP rises or falls depending on which policy is stronger.
• E) consumption expenditure either rises or falls depending on whether or not the tax increase dominates the effect of climbing GDP.

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