The Economy Is in Long-Run Equilibrium

Multiple Choice

The economy is in long-run equilibrium.The aggregate demand curve shifts $40 billion to the left.The government wants to change its spending to offset this decrease in demand.The MPC is .60.Suppose the effect on aggregate demand from a change in taxes is 3/5 the size of the change from government expenditures.What should the government do if it wants to offset the decrease in real GDP?

A) raise both taxes and expenditures by $40 billion dollars.
B) raise both taxes and expenditures by $40 billion dollars
C) reduce both taxes and expenditures by $10 billion dollars
D) reduce both taxes and expenditures by $10 billion dollars.