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:

Normative Statement

Statements that express an opinion or a value judgment, often involving what ought to be rather than what is.

Normative Statement

A statement that expresses a value judgment about whether a situation is desirable or undesirable; it looks at the world as it "should" be.

Federal Reserve

The central banking system of the United States, responsible for monetary policy, regulating banks, and ensuring financial system stability.

Prescriptive Statement

Normative assertions that suggest how things should be, often based on opinions or value judgments.