Exhibit 11-7 Aggregate Demand and Supply Model Suppose the Economy

question 156

Multiple Choice

Exhibit 11-7 Aggregate demand and supply model Suppose the economy in Exhibit 11-7 is in equilibrium at point E₁ and the marginal propensity to consumer (MPC) is 0.75. Following Keynesian economics, to lower the price level from 170 to 150, the government should reduce its spending by:

• A)$20 billion.
• B)$100 billion.
• C)$133 billion.
• D)$400 billion.

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Definitions:

Inflation

Refers to the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.

Purchasing Power

The worth of currency measured by how many goods or services can be purchased with one unit of it.

Deflation

A decrease in the general price level of goods and services, often leading to an increase in the real value of money.

Annual Interest Rate

The percentage of the principal that is paid as interest to the lender over the course of a year.