Suppose That the Economy Is Operating in Full-Employment Equilibrium Along

question 196

Multiple Choice

Suppose that the economy is operating in full-employment equilibrium along the vertical section of the aggregate supply curve. If the aggregate demand curve is reduced by $100 billion in order for the price level to decline by 5 percent, and if the marginal propensity to consume (MPC) is 0.75, then what change in taxes would generate the desired price reduction?

• A) $300 billion.
• B) − $75 billion.
• C) − $33.3 billion.
• D) − $25 billion.