If the MPS in an economy is .4, government could shift the aggregate demand curve leftward by $50 billion at each price level by:
A)reducing government expenditures by $125 billion.
B)reducing government expenditures by $20 billion.
C)increasing taxes by $50 billion.
D)increasing taxes by $250 billion.

Question

Quizplus · Accepted Answer

The government can shift the aggregate demand curve leftward by reducing government expenditures or increasing taxes. The formula to calculate the impact on aggregate demand is as follows:

ΔY = -ΔG/(1-MPC) = -ΔT * MPC/(1-MPC)

We can rearrange this formula to find the required reduction in government expenditures or increase in taxes:

ΔG = $50 billion * (1-0.4) = $30 billion

ΔT = $50 billion * 0.4/(1-0.4) = $20 billion

Therefore, reducing government expenditures by $30 billion or increasing taxes by $20 billion would shift the aggregate demand curve leftward by $50 billion at each price level. Out of the given choices, only option B reduces government expenditures by $20 billion, which is the best option.

If the MPS in an Economy Is