Initially,the Economy Is in Long-Run Equilibrium

question 6

Multiple Choice

Initially,the economy is in long-run equilibrium.The aggregate demand curve then shifts $50 billion to the left.The government wants to change its spending to offset this decrease in demand.The MPC is 0.80.Suppose the effect on aggregate demand from a change in taxes is 4/5 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 aggregate demand?

• A)Raise both taxes and expenditures by $5.56 billion dollars.
• B)Raise taxes by $40 billion dollars and increase expenditures by $50 billion dollars.
• C)Reduce taxes by $10 billion dollars and increase expenditures by $10 billion dollars.
• D)Reduce taxes by $5.56 billion dollars and increase expenditures by $5.56 billion dollars.

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Definitions:

Interest Expense

The cost incurred by an entity for borrowed funds, including loans, bonds, or lines of credit.

Equity Multiplier

A financial ratio indicating how much of a company's assets are financed by shareholders' equity.

Total Assets

The sum of all resources owned by a company, valued in terms of the financial benefits they bring, and listed on the balance sheet.

Total Liabilities

The sum of all financial obligations a company owes to outside parties, including debts and other financial commitments.