You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion; (2) investment = $50 billion; (3) government purchases = $100 billion; and (4) net export = $20 billion. If the full-employment level of GDP for this economy is $620 billion, then what combination of actions would be most consistent with the goal of achieving price level stability? A. Increase government spending and taxes. B. Decrease government spending and taxes. C. Decrease government spending and increase taxes. D. Increase government spending and decrease taxes.

The correct answer is option C.

Explanation:

The following information is given about the aggregate demand at the current price level.

The consumption spending is $500 billion.

The investment expenditure is $50 billion.

The government spending is $100 billion.

The net exports are $20 billion.

The aggregate demand in the economy is

= C + I + G + NX

= $500 + $50 + $100 + $20

= $670

The full employment level is $620 billion.

This implies that the economy is facing an inflationary gap as the aggregate demand or GDP is higher than the full employment level.

In this situation, the government needs to adopt a contractionary fiscal policy. The government should increase taxes and reduce spending. This will reduce disposable income and thus aggregate demand.