Refer to the information provided in Figure 24.5 below to answer the question(s) that follow. Figure 24.5
-Refer to Figure 24.5. If the economy is in equilibrium and the government increases taxes by $100 billion, equilibrium aggregate output ________ to $________ billion.

Question

Refer to the information provided in Figure 24.5 below to answer the question(s) that follow.  Figure 24.5
-Refer to Figure 24.5. If the economy is in equilibrium and the government increases taxes by $100 billion, equilibrium aggregate output ________ to $________ billion.

Quizplus · Accepted Answer

In the Keynesian model, an increase in taxes would decrease consumption spending, which in turn would decrease aggregate output. The decrease in aggregate output would be a multiple of the initial decrease in consumption spending, given the marginal propensity to consume. In this case, the initial decrease in consumption spending would be $80 billion (given the marginal propensity to consume of 0.8), which would lead to a decrease in equilibrium output of 4 times that amount, or $320 billion. Therefore, the new equilibrium output would be $1,300 billion ($1,620 billion minus $320 billion).

Refer to the Information Provided in Figure 24