Initially, the Economy Is in Long-Run Equilibrium

question 93

Multiple Choice

Initially, the economy is in long-run equilibrium. The aggregate demand curve then shifts $40 billion to the left. The government wants to change its spending to offset this decrease in demand. The MPC is 0.60. Suppose the effect on aggregate demand from a change in taxes is 3/5 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 real GDP?

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

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