Suppose the price level is fixed, the MPC is .5, and the GDP gap is a negative $100 billion. To achieve full-employment output (exactly), government should:

A. increase government expenditures by $100 billion.

B. increase government expenditures by $50 billion.

C. reduce taxes by $50 billion.

D. reduce taxes by $200 billion.

ANSWER:

B. increase government expenditures by $50 billion.