Narrbegin Exhibit 17.2 Aggregate demand and supply model -Suppose the economy in Exhibit 17.2 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 spending by $50 billion. B) decreasing government spending by $6 billion. C) decreasing government spending by $50 billion. D) decreasing government spending by $100 billion.

Question

Quizplus · Accepted Answer

According to Keynesian economics, the government can reduce inflation by decreasing government spending. In this case, the government should decrease spending by $50 billion to move the economy from E₁ to E₂. The MPC is given, but it does not play a role in determining the correct answer.