In a certain year, the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases.Full-employment GDP is $120 billion.To obtain price-level stability under these conditions, the government should
A)increase tax rates and/or reduce government spending.
B)discourage personal saving by reducing the interest rate on government bonds.
C)increase government expenditures.
D)encourage private investment by reducing corporate income taxes.

Question

Quizplus · Accepted Answer

The total aggregate demand is $170 billion ($100B consumption + $40B investment + $10B net exports + $20B government purchases), which exceeds the full-employment GDP of $120 billion. To achieve price-level stability, the government should reduce aggregate demand by increasing taxes or reducing government spending.

In a Certain Year, the Aggregate Amount Demanded at the Existing