Macroeconomics question help
Hello, I am new here. I am having some trouble understanding this problem
If APS is .2 and MPS is .10, a simultaneous increase in both taxes and government spending of $30 billion will:
(a) reduce consumption by $27B, increase government spending by $27B, and increase GDP by $30B
(b) reduce consumption by $27B, increase government spending by $27B, and increase GDP by $27B
(c) reduce consumption by $24B, increase government spending by $30B, and increase GDP by $30B
(d) reduce consumption by $24B, increase government spending by $24B, and increase GDP by $24B
The answer in the study guide says (A) is the answer. I understand the first part (consumption goes down $27B) as well as the third part (Real GDP goes up by $30B), but I can't for the life of me understand the 2nd part.
In order for Real GDP to increase by $30B when a $30B tax is imposed, Gov't spending must increase by $30B. This is according to the Balanced Budget multiplier. I think answer (A) has a typo, but I can't be sure.
Therefore, why does the answer say Gov't spending only goes up by $27B? As far as I know, tax increase will cause Consumption to go down by $27B and Savings to go down by $3B. Gov't increasing their spending shouldn't have anything to do with MPS/MPC right?
Can anyone shed some light on this for me?
Thanks!