The Economy Is in Long-Run Equilibrium

question 84

Multiple Choice

The economy is in long-run equilibrium.The aggregate demand curve shifts $80 billion to the left.The government wants to change spending to offset this decrease in demand.The MPC is .75.Suppose the effect on aggregate demand of a tax change is 3/4 as strong as the effect of a change in government expenditure.What should the government do if it wants to offset the decrease in real GDP?

• A)raise both taxes and expenditures by $80 billion dollars.
• B)raise both taxes and expenditures by $10 billion dollars.
• C)reduce both taxes and expenditures by $80 billion dollars.
• D)reduce both taxes and expenditures by $10 billion dollars.

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