Suppose the Closed Economy Is in Long-Run Equilibrium

question 95

Multiple Choice

Suppose the closed economy is in long-run equilibrium. Advances in technology shift the long-run aggregate-supply curve $80 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 0.75, by how much must the government cut its spending?

• A) $4 billion
• B) $40 billion
• C) $75 billion
• D) $150 billion

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