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Macroeconomics

Course: Macroeconomics > Unit 3

Lesson 8: Fiscal policy

Fiscal policy to address output gaps
Calculating change in spending or taxes to close output gaps
Tax lever of fiscal policy
Lesson summary: Fiscal policy
Fiscal policy

Fiscal policy

AP.MACRO: POL (BI), POL‑1 (EU), POL‑1.A (LO), POL‑1.A.1 (EK), POL‑1.A.2 (EK), POL‑1.A.3 (EK), POL‑1.A.4 (EK), POL‑1.A.5 (EK), POL‑1.A.6 (EK), POL‑1.A.7 (EK), POL‑1.B (LO), POL‑1.B.1 (EK)

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Before experiencing the supply shock shown in this graph, Maxistan was in long-run equilibrium. The marginal propensity to consume (MPC) Maxistan is 0, point, 75.

Which of the following is a fiscal policy action that would be the best choice to return the economy to full employment output?

(Choice A)
Increase taxes by dollar sign, 75 million
(Choice B)
Decrease taxes by dollar sign, 25 million
(Choice C)
Decrease government spending dollar sign, 25 million
(Choice D)
Increase government spending dollar sign, 25 million
(Choice E)
Decrease government spending by dollar sign, 75 million

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Macroeconomics

Course: Macroeconomics > Unit 3

Problem