Exhibit 15-5 Aggregate demand and supply model Suppose the economy in Exhibit 15-5 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: A) increasing government tax revenue by $6 billion. B) decreasing government tax revenue by $6.2 billion. C) decreasing government tax revenue by $200 billion. D) increasing government tax revenue by approximately $66 billion. E) decreasing government tax revenue by approximately $66 billion.

Question

Quizplus · Accepted Answer

According to Keynesian economics, the government can reduce inflation by increasing aggregate demand through decreasing taxes. We know the following:
- MPC = 0.75 (meaning that households will spend 75% of any additional income)
- The distance between ES1U1B11 and ES1U1B12 is $88 billion (this is the amount needed to shift the aggregate demand curve to the right)
To calculate the change in taxes required to achieve this shift, we can use the following formula:
Change in taxes = (change in government spending) / (MPC)
Change in taxes = $88 billion / 0.75
Change in taxes = $117.33 billion
This means that the government needs to decrease taxes by approximately $117.33 billion to achieve the desired shift in aggregate demand. Therefore, the correct choice is E, decreasing government tax revenue by approximately $66 billion (the closest choice to $117.33 billion).

Exhibit 15-5 Aggregate Demand and Supply Model Suppose the Economy