You are hired by the Bureau of Economic Analogies (BEA) as an economic consultant. The chairperson of the BEA tells you that he believes the current unemployment rate is too high. The unemployment rate can be reduced if aggregate output increases. He wants to know what policy to pursue to increase aggregate output by $700 billion. The best estimate he has for the
MPC is 0.8. Which of the following policies should you recommend?
◦ reduce government spending by $350 billion and reduce taxes by $250 billion
◦ increase both government spending and taxes by $700 billion
◦ increase government spending by $350 billion and reduce taxes by $700 billion
◦ increase government spending by $700 billion and taxes by $600 billion
Conventional view of economic activity
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