Suppose That the Government Allocates $2 Billion for New Roads

Multiple Choice

Suppose that the government allocates $2 billion for new roads. It also raises taxes by $2 billion to keep the deficit from growing. If the marginal propensity to consume = 0.8, what is the effect on equilibrium GDP?

A) GDP does not change
B) GDP increases by $5 billion
C) GDP increases by $800 million
D) GDP increases by $2 billion