Refer to the information provided in Figure 9.5 below to answer the questions that follow. Figure 9.5
-Refer to Figure 9.5. If the economy is in equilibrium and the government increases taxes by $50 billion, equilibrium aggregate output ________ to $________ billion.

Question

Refer to the information provided in Figure 9.5 below to answer the questions that follow.  Figure 9.5
-Refer to Figure 9.5. If the economy is in equilibrium and the government increases taxes by $50 billion, equilibrium aggregate output ________ to $________ billion.

Quizplus · Accepted Answer

According to the diagram, the initial equilibrium aggregate output is $1,500 billion at point E where the 45-degree line intersects the aggregate expenditure line. If the government increases taxes by $50 billion, the aggregate expenditure line will shift downward by a multiple of the tax multiplier, which is 1.25 in this case ($50 billion divided by the initial slope of the aggregate expenditure line, which is 0.4). The new equilibrium aggregate output will be where the new aggregate expenditure line intersects the 45-degree line, which is at point F at $1,450 billion. Therefore, equilibrium aggregate output decreases to $1,450 billion, so the correct answer is C.

Refer to the Information Provided in Figure 9