Initially,the Economy Is in Long-Run Equilibrium

question 68

Multiple Choice

Initially,the economy is in long-run equilibrium.The aggregate demand curve then shifts $80 billion to the left.The government wants to change spending to offset this decrease in demand.The MPC is 0.75.Suppose the effect on aggregate demand of a tax change is 3/4 as strong as the effect of a change in government expenditure.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 $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.