The government wishes to reduce he price level by reducing real GDP by $400 billion. Assuming a tax multiplier of 4 and a government spending multiplier of 5, which of the following policy prescriptions would reduce the aggregate demand curve by $400 billion?
A. Decreasing government spending by $400 billion and increasing taxes by $100 billion.
B. Decreasing government spending by $160 billion and decreasing taxes by $100 billion.
C. Decreasing government spending by $40 billion and decreasing taxes by $40 billion.
D. Decreasing government spending by $100 billion and keeping taxes the same.
Answer: B
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