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:

Question

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:

Quizplus · Accepted Answer

To reduce inflation, the government should decrease aggregate demand. With an MPC of 0.75, the spending multiplier is 4. To offset a $200 billion inflationary gap, the government should increase taxes by $66 billion (200/3), as the tax multiplier is one less than the spending multiplier.

Exhibit 15-5 Aggregate Demand and Supply Model