Let Taxes Be Set Equal to T, Consumption Be Given

question 14

Multiple Choice

Let taxes be set equal to T, consumption be given by C = a + bY - T) , investment and government spending be exogenous, and net exports be characterized by X = g - mY. Suppose both T and G increase by $10 billion. How much would equilibrium GDP increase?

• A) It would increase by $10 billion.
• B) It would increase by less than $10 billion.
• C) It would increase by more than $10 billion.
• D) It would be unaffected, since the federal deficit would be unchanged.
• E) It would increase by more or less than $10 billion depending on the values assumed by a, b, g, and m.

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