Assume the MPC is 0.80.If the government wants to eliminate an AD shortfall of $300 billion,it should

Question

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To eliminate an AD shortfall of $300 billion with an MPC of 0.80, the government needs to cut taxes by an amount that, when multiplied by the spending multiplier (1/(1-MPC) = 1/(1-0.80) = 5), equals $300 billion. A $75 billion tax cut multiplied by the multiplier of 5 equals $375 billion, which is more than needed. However, due to the lack of options that exactly match the required calculation (a $60 billion increase in spending or tax cut would directly lead to a $300 billion increase in AD considering the multiplier), option A is the closest correct choice given the options provided, acknowledging a mistake in the explanation. The correct approach would be to find a tax cut that, when considering the multiplier effect, exactly matches the $300 billion increase needed. With an MPC of 0.80, the multiplier is 5. Therefore, to directly address a $300 billion shortfall, the government should aim for a direct impact that, when multiplied, achieves this target. None of the options provided directly achieve this without considering the error in the initial explanation.

Assume the MPC Is 0