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:

Sprain

An injury to ligaments caused by being stretched beyond their normal capacity and possibly torn.

Osteoporosis

A condition characterized by weakened bones that are more prone to fracture due to a decrease in bone density and quality.

Rheumatoid Arthritis

A chronic autoimmune disorder that primarily affects joints, leading to inflammation, pain, and eventually joint damage and deformity.

Bone Remodeling

The continuous turnover process of bone tissue that involves bone formation and resorption.