Exhibit 15-3 Aggregate demand and supply model Suppose the economy in Exhibit 15-3 is in equilibrium at point E₁, and the marginal propensity to consume (MPC) is 0.80. Following Keynesian economics, to restore full employment, the government should cut taxes by: A) $0.20 trillion. B) $250 billion. C) $0.50 trillion. D) $1 trillion.

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Quizplus · Accepted Answer

According to Keynesian economics, to restore full employment, the government should increase aggregate demand. Since the MPC is 0.80, a tax cut of $250 billion will increase disposable income by $200 billion ($250 billion x 0.80), which will in turn increase consumption and shift the aggregate demand curve to the right, leading to higher output and employment.

Exhibit 15-3 Aggregate Demand and Supply Model Suppose the Economy