Suppose the government increases unemployment benefits,which are paid for with higher taxes on earnings.If the marginal propensity to consume is the same for both the beneficiaries of the unemployment benefits and the workers paying taxes,_____.
A)GDP will first increase and then fall.
B)There will be no change in real GDP.
C)Real GDP will increase substantially.
D)Real GDP will fall substantially.
E)GDP will first fall and then increase.

Question

Quizplus · Accepted Answer

If the marginal propensity to consume is the same for both the beneficiaries of the unemployment benefits and the workers paying taxes, then there will be no net change in total consumption spending. As a result, there will be no significant change in aggregate demand and thus no significant change in real GDP. Therefore, the correct answer is B.

Suppose the Government Increases Unemployment Benefits,which Are Paid for with Higher