Final answer:
To shift aggregate demand leftward by $32 billion with an MPC of 0.80, the government can increase taxes by $6.4 billion, leveraging the multiplier effect of 5. Therefore, the correct option is increasing taxes by $6.4 billion.
Step-by-step explanation:
If the Marginal Propensity to Consume (MPC) in an economy is 0.80, we can use the multiplier effect to understand how changes in fiscal policy can shift the aggregate demand curve. The multiplier is calculated as 1/(1 - MPC), which in this case would be 1/(1 - 0.80) = 5. Therefore, to achieve a shift in the aggregate demand curve of $32 billion leftward, we divide the desired decrease in aggregate demand by the multiplier. This gives us $32 billion / 5 = $6.4 billion.
In terms of policy options, increasing taxes and reducing government expenditures can have similar effects on aggregate demand. Importantly, the initial reduction in government spending or the increase in taxes is amplified by the multiplier effect. In this scenario, if the government increases taxes or reduces expenditures by $6.4 billion, the aggregate demand will decrease by $32 billion due to the multiplier effect.
Therefore, the correct option to shift aggregate demand leftward by $32 billion with an MPC of 0.80 is: increasing taxes by $6.4 billion.