Final answer:
To decrease aggregate demand by $48 billion with an MPS of 0.25, the multiplier effect tells us government spending should be decreased by $12 billion. However, none of the given options match this calculation, suggesting a possible error in the question or the need for clarification.
Step-by-step explanation:
The question asks about the actions the government could take to decrease aggregate demand by $48 billion at each price level to control demand-pull inflation and decrease real GDP, given an MPS (marginal propensity to save) of 0.25.
To determine the right fiscal policy action—either changing government spending or taxation—we apply the multiplier effect. The multiplier is calculated as 1 divided by MPS, which in this case is 1 / 0.25 = 4. Since the government wants to decrease aggregate demand by $48 billion, we can divide this target by the multiplier to get the required change in fiscal policy.
A. To decrease government spending, the government would need to cut spending by $48 billion / 4 = $12 billion (not an option given in the question).
B. To increase taxes, the same logic applies; however, the change in taxes would have a smaller effect because it affects disposable income first, and then consumption. Therefore, increasing taxes typically has less of a direct effect on aggregate demand than decreasing government expenditures. The change in taxes would thus be higher than the reduction in spending to achieve the same reduction in aggregate demand, but none of the given options match the calculated amount for tax increase.
C. Decreasing government spending by $10 billion is not enough given our multiplier calculation (we need a $12 billion decrease).
D. Increasing taxes by $24 billion is also not correct by our calculations, which did not yield this amount.
However, since none of the given options correctly matches the result obtained through the multiplier, and a definitive answer is not possible with the given options, the question might contain an error or require clarification.