Exhibit 17-1 Aggregate demand and supply model

-Suppose the economy in Exhibit 17-1 is in equilibrium at point E₁ and the marginal propensity to consume (MPC)is 0.8.Following Keynesian economics,to restore full employment,the government should cut taxes by:
A)$200 billion.
B)$250 billion.
C)$500 billion.
D)$1 trillion.

Question

Exhibit 17-1 Aggregate demand and supply model
 
-Suppose the economy in Exhibit 17-1 is in equilibrium at point E₁ and the marginal propensity to consume (MPC)is 0.8.Following Keynesian economics,to restore full employment,the government should cut taxes by:
A)$200 billion. 
B)$250 billion. 
C)$500 billion. 
D)$1 trillion.

Quizplus · Accepted Answer

The correct answer is B because the government should cut taxes by $250 billion to restore full employment.

Exhibit 17-1 Aggregate Demand and Supply Model