Suppose the Government Is Mandated by Law to Have a Balanced

Multiple Choice

Suppose the government is mandated by law to have a balanced budget. The marginal propensity to consume is 0.9. The government raises both taxes and spending by $10 billion. According to the notion of the balanced budget multiplier:

A) there is no effect on the economy, because the tax and spending increases cancel each other out.
B) income rises by $10 billion, because taxes reduce spending by $90 billion and government spending raises total spending by $100 billion.
C) income falls by $10 billion, because taxes reduce spending by $100 billion and government spending raises total spending by $90 billion.
D) the final effect cannot be determined using the simple Keynesian framework because the impact on prices is not known.