Consider a Closed Economy in Which Consumption Is Described by

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.