To eliminate an AD shortfall of $120 billion when the economy has an MPC of 0.75,the government should decrease taxes by

Question

Quizplus · Accepted Answer

The equation to calculate the amount of tax cut to eliminate an AD shortfall is: Tax Cut = (AD shortfall) / MPC. 
In this case, Tax Cut = $120 billion / 0.75 = $160 billion. 
Therefore, the government should decrease taxes by $40 billion to eliminate the AD shortfall of $120 billion.

To Eliminate an AD Shortfall of $120 Billion When the Economy