Question: The President economic advisors have announced that a $40 billion increase in aggregate demand would lower unemployment to an acceptable level. The MPC is 80 percent. How should this increase in aggregate demand be accomplished?
a. How big an increase in government spending would be necessary? Explain.
b. How much would transfer payments have to increase to boost aggregate demand by $40 billion? Explain.
c. How much should taxes be cut to accomplish this goal? Explain.
d. How big an increase in investment spending (induced by a tax expenditure) would be needed? Explain.
e. Which is the best plan? Explain how you arrived at your conclusion.