Initially, the Economy Is in Long-Run Equilibrium

question 93

Multiple Choice

Initially, the economy is in long-run equilibrium. The aggregate demand curve then shifts $40 billion to the left. The government wants to change its spending to offset this decrease in demand. The MPC is 0.60. Suppose the effect on aggregate demand from a change in taxes is 3/5 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 real GDP?

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

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Definitions:

Mental Aptitudes

Natural abilities or talents that influence an individual's capacity to learn and perform in various tasks.

Heritability

A measure of how much of the variation in a trait among individuals can be attributed to genetic differences.

Emotional Intelligence

The ability to understand, use, and manage one's own emotions in positive ways to relieve stress, communicate effectively, empathize with others, and overcome challenges.

Analytical Intelligence

The aspect of intelligence that involves the ability to analyze, evaluate, judge, compare, and contrast information.