Exhibit 15-4 Aggregate demand and supply model Suppose the economy in Exhibit 15-4 is in equilibrium at point E₁ and the marginal propensity to consume (MPC) is 0.75. Following Keynesian economics, the federal government can move the economy to point E₂ and reduce inflation by:

Question

Quizplus · Accepted Answer

According to the aggregate demand and supply model, to move the economy from E₁ to E₂, the government needs to increase aggregate demand by increasing government spending or decreasing taxes. Since the MPC is 0.75, a decrease in taxes by $33 billion (0.75 x $33 billion = $24.75 billion) will increase consumption spending by $24.75 billion, which in turn will increase aggregate demand and move the economy to point E₂ where inflation is reduced. Therefore, the best choice is D.

Exhibit 15-4 Aggregate Demand and Supply Model Suppose the Economy