Exhibit 15-7 Aggregate demand and supply model

-Beginning at equilibrium E₁ in Exhibit 15-7,assume the marginal propensity to consume (MPC)is 0.90 and the government increases taxes by $100 billion.The aggregate demand curve will shift to the:

Question

Exhibit 15-7 Aggregate demand and supply model
 
-Beginning at equilibrium E₁ in Exhibit 15-7,assume the marginal propensity to consume (MPC)is 0.90 and the government increases taxes by $100 billion.The aggregate demand curve will shift to the:

Quizplus · Accepted Answer

When taxes increase, disposable income decreases, leading to a decrease in consumption spending. Assuming a MPC of 0.90, the aggregate demand curve will shift leftward by a multiple of the initial decrease in consumption spending, which is 0.9 x $100 billion = $90 billion. Therefore, the correct answer is D, as the aggregate demand curve will shift left by $900 billion.

Exhibit 15-7 Aggregate Demand and Supply Model