Assume an economy consisting of a consumption sector, a government sector, a foreign sector, and a business investment sector. (C + I + G + X = GDP). Also assume that the Marginal Propensity to Save (MPS) = 0.2. If government spending increases by $70B and taxes also increase by $70B.
A) Consumption will fall by $56B, but GDP will increase by $70B
B) Consumption will fall by $70B and GDP will remain the same
C) Consumption will fall by $350B and GDP will increase by $350 so the net effect is $0
D) GDP will increase $350B