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The government increases both its expenditures and taxes by $400 billion. There is no crowding out and no accelerator effect. Aggregate demand shifts by $400 billion. Which of the following is consistent with how far aggregate demand shifts?

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Answer Choices:

A.  MPC = 1/2, and the effects of the increase in taxes is 1/2 as strong as the change in government expenditures.

B.  MPC = 2/3, and the effects of the increase in taxes is 2/3 as strong as the change in government expenditures

C.  MPC = 3/4, and the effects of the increase in taxes is 3/4 as strong as the change in government expenditures

D.  All of the above are correct.

Answer:

D.  All of the above are correct.

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