Determine the total effect on aggregate demand

Reference no: EM1370514

A government is recently operating with an annual budget deficit of $40 billion. The government has determined that;

--The marginal propensity to consume is 0.75.
--To eliminate an inflationary gap and take into account the resulting change in the price level, the government must generate a net leftward shift in the aggregate demand curve equal to $40 billion.

Suppose that there are no direct expenditure offsets to fiscal policy, how much should the government increase taxes? Explain by giving appropriate reasons.

Reference no: EM1370514

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