1. Suppose the government reduces taxes by $20 billion and that the MPC is .75 What is the total effect of the tax cut on aggregate demand? How does the

total effect of this $20 billion tax cut compare to the total effect of a $20 billion increase in government purchases? Why? Where must the government believe the economy is presently? Draw and label a graph illustrating both where they think we are presently and the changes which will occur with the change in net taxes.