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:

Adding Value

The process of enhancing a product or service to make it more attractive to customers, thereby increasing its worth.

Venture Capital Firm

A company that invests in startups and early-stage companies with high growth potential in exchange for equity.

Entrepreneur

An individual who organizes, operates, and assumes the risk for a venture, innovating and transforming ideas into economically viable entities.

Tax Exposure

The degree to which an individual or organization is subject to taxes or the risk of tax-related liabilities.