O fall during periods of prosperity and thus reduce federal budget deficits O ri

Question

O fall during periods of prosperity and thus reduce federal budget deficits O rise during periods of prospernty and thus increase federal budget deficits 2 pts D Question 46 Exhibit 11-3 Aggregate demand and supply model AS 250 200 150 125 100 Price level (CPI) Full employment AD 0 80 85 90 95 10O] 10.5 Real GDP (tillions of dollars per year) Suppose the economy in Exhibit 11-3 is in equilibrium at point Ei, and the marginal ty to consume (MPC) is 0.80. Following Keynesian economics, to restore full employment, the government should cut taxes by O SO.20 trillion. O $250 billion. O S0.50 trillion. O SI trillion.

Explanation / Answer

With the MPC of 0.8, the multiplier in the economy will be 5. if the government cut the tax by $0.20 trillion the economy will reach a full employment equilibrium.

the answer is "A".

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