In a certain year, the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government
Purchases. Full-employment GDP is $120 billion. To obtain price-level stability under these conditions,
The government should
A) increase tax rates and/or reduce government spending.
B) discourage personal saving by reducing the interest rate on government bonds.
C) increase government expenditures.
D) encourage private investment by reducing corporate income taxes.

Question

Quizplus · Accepted Answer

To achieve price-level stability when aggregate demand is already close to full-employment GDP, the government should decrease aggregate demand. Option A, which involves decreasing government spending, is the best choice. This will lead to a decrease in aggregate demand, effectively reducing the pressure on prices. The other options will increase aggregate demand, which will cause prices to rise and potentially lead to inflation.

In a Certain Year, the Aggregate Amount Demanded at the Existing