In an economy, the government wants to decrease aggregate demand by $48 billion at each price level to decrease real GDP and control demand-pull inﬂation. If the MPS is 0.25, then it could
A) increase taxes by $16 billion.
B) increase taxes by $24 billion.
C) decrease government spending by $10 billion.
D) decrease government spending by $16 billion.

Question

Quizplus · Accepted Answer

The correct answer is A because increasing taxes by $16 billion would decrease disposable income by $16 billion, which would then decrease consumption spending by $12 billion (MPS of 0.25). This would then decrease aggregate demand by $12 billion, which is the desired amount.

In an Economy, the Government Wants to Decrease Aggregate Demand