Suppose the Closed Economy Is in Long-Run Equilibrium

question 58

Multiple Choice

Suppose the closed economy is in long-run equilibrium. Advances in technology shift the long-run aggregate supply curve $75 billion to the right. Optimistic investors have shifted the aggregate demand curve $150 billion to the right. In order to stabilize the price level at its original value, the government wants to reduce its spending. If the crowding-out effect is always half of the multiplier effect, and if the MPC equals 0.8, by how much must the government cut its spending?

• A)$4 billion
• B)$30 billion
• C)$75 billion
• D)$150 billion

---

Definitions:

Human Relations School

An approach in organizational management that emphasizes social relations at work and the importance of worker satisfaction.

Decision-making Innovations

New methods or processes improving the way decisions are made, often leading to more efficient or effective outcomes.

Industrialized Countries

Nations that have highly developed industries and infrastructure, offering a high standard of living and technological advancement.

Early 1970s

A period marked by significant cultural, political, and technological changes worldwide, roughly spanning from 1970 to 1974.