Suppose the Closed Economy Is in Long-Run Equilibrium

Multiple Choice

Suppose the closed economy is in long-run equilibrium. Advances in technology shift the long-run aggregate supply curve $75 billion to the right. Optimistic investors have shifted the aggregate demand curve $150 billion to the right. In order to stabilize the price level at its original value, the government wants to reduce its spending. If the crowding-out effect is always half of the multiplier effect, and if the MPC equals 0.8, by how much must the government cut its spending?

A) $4 billion
B) $30 billion
C) $75 billion
D) $150 billion