Consider a hypothetical closed economy in which the marginal propensity to consume (MPC) is 0.5 and taxes do not vary with income (that is, taxes are fixed rather than variable and the income tax rate t = 0). The following graph shows the aggregate demand curves (AD; and AD;), the short-run aggregate supply (AS) curve, and the long-run aggregate supply curve at the potential GDP level. The economy is currently at point A. 140 5 Potential GDP 136 AS,,, 132 128 - w > w = 124 W o ' o 120 116 112 108 { 200 300 400 500 600 700 800 900 1000 REAL GDP (Billions of dollars) The economy is currently experiencing an expansionary W gap of $100 billion. To close this gap, one option would be for the government to decrease government purchases by $125 billion (assuming net taxes do not change). If the government kept its purchases constant, it could also close the gap by raising " net taxes (taxes minus transfers) by $250 billion. - MPC (Hint: In this case, since taxes do not vary with income, the formula for the multiplier for a change in fixed taxes is T B