Initially,the Economy Is in Long-Run Equilibrium

question 6

Multiple Choice

Initially,the economy is in long-run equilibrium.The aggregate demand curve then shifts $50 billion to the left.The government wants to change its spending to offset this decrease in demand.The MPC is 0.80.Suppose the effect on aggregate demand from a change in taxes is 4/5 the size of the change from government expenditures.There is no crowding out and no accelerator effect.What should the government do if it wants to offset the decrease in aggregate demand?

• A)Raise both taxes and expenditures by $5.56 billion dollars.
• B)Raise taxes by $40 billion dollars and increase expenditures by $50 billion dollars.
• C)Reduce taxes by $10 billion dollars and increase expenditures by $10 billion dollars.
• D)Reduce taxes by $5.56 billion dollars and increase expenditures by $5.56 billion dollars.

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Definitions:

Müllerian Mimicry

The resemblance of dangerous, unpalatable, or poisonous species to one another so that potential predators recognize them more easily. Compare with Batesian mimicry.

Batesian Mimicry

The resemblance of a harmless or palatable species to one that is dangerous, unpalatable, or poisonous so that predators are more likely to avoid them. Compare with Müllerian mimicry.

Warning Colors

Bright colors exhibited by some animals as an evolutionary strategy to warn predators of their toxicity or unpleasant taste.

Poisonous Snakes

Snakes that contain venom harmful to humans or animals if injected via bites or ingested.