If no fiscal policy changes are made,suppose the current aggregate demand curve will increase horizontally by $1000 billion and cause inflation.If the marginal propensity to consume is 0.75,federal policymakers could follow Keynesian economics and restrain inflation by decreasing:
A)government spending by $250 billion.
B)taxes by $100 billion.
C)taxes by $1000 billion.
D)government spending by $1000 billion.
E)government spending by $750 billion.

Question

Quizplus · Accepted Answer

To restrain inflation, the government should decrease spending. With a marginal propensity to consume of 0.75, the spending multiplier is 1/(1-0.75) = 4. To offset a $1000 billion increase in aggregate demand, government spending should decrease by $1000 billion / 4 = $250 billion.

If No Fiscal Policy Changes Are Made,suppose the Current Aggregate