The increase in aggregate demand from AD₁ to AD2 causes inflation. Suppose the marginal propensity to consume (MPC) is 0.75. The government wants to avoid the double-digit inflation associated with the shift from AD₁ to AD2. The lowest possible price level associated with full-employment output is 105. To achieve a price level of 105 and full-employment output, the government must enact a fiscal policy that reduces aggregate demand by $20 billion at each price level. To reduce aggregate demand by $20 billion, the government can government expenditures by If the government wants to use a change in tax policy instead to reduce aggregate demand by $20 billion, it should by taxes

The increase in aggregate demand from AD₁ to AD2 causes inflation. Suppose the marginal propensity to consume (MPC) is 0.75. The government wants to avoid the double-digit inflation associated with the shift from AD₁ to AD2. The lowest possible price level associated with full-employment output is 105. To achieve a price level of 105 and full-employment output, the government must enact a fiscal policy that reduces aggregate demand by $20 billion at each price level. To reduce aggregate demand by $20 billion, the government can government expenditures by If the government wants to use a change in tax policy instead to reduce aggregate demand by $20 billion, it should by taxes

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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