The graph below depicts an economy where a decline in aggregate demand has cause

Question

The graph below depicts an economy where a decline in aggregate demand has caused a recession. Assume the government decides to conduct fiscal policy by changing taxes to reduce the burden of this recession. Instructions: Include a negative sign (-) if necessary. How much does aggregate demand need to change to restore the economy to its long-run equilibrium? $_____billion Assuming the MPC in this nation is 0.75, how much do taxes need to change to shift aggregate demand by the amount you found in ? $______billion Now suppose the MPC is 0.6. To restore the economy to its long-run equilibrium, aggregate demand must be changed by $_____billion and taxes must be changed by $________billion.

Explanation / Answer

a.$120 billions

b. $40 billions

c. $120 billions, and $66.66 billions

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