If AD excess equals $40 billion and the MPC equals 0.75,then the desired fiscal restraint equals

Question

Quizplus · Accepted Answer

The formula for calculating the desired fiscal restraint (DFR) is DFR = MPC x AD excess. Plugging in the given values, we get DFR = 0.75 x $40 billion = $30 billion. However, this is the total amount of fiscal restraint needed to close the AD gap. Since the question asks for the desired fiscal restraint, which is the amount of government spending or increase in taxes needed to close the gap, we need to subtract the change in autonomous expenditures (which caused the AD gap) from the total DFR. If we assume that autonomous expenditures remain unchanged, then the desired fiscal restraint would only involve reducing government spending or increasing taxes by an amount equal to the AD excess, which is $40 billion. Therefore, the answer is A) $10 billion ($40 billion - $30 billion = $10 billion).

If AD Excess Equals $40 Billion and the MPC Equals