If no fiscal policy changes are implemented, suppose the future aggregate demand curve will shift and exceed the current aggregate demand curve by \(\$ 900\) billion at any level of prices. Assuming the marginal propensity to consume \((M P C)\) is \(0.90,\) this increase in aggregate demand could be prevented by a. increasing government spending by \(\$ 500\) billion. b. increasing government spending by \(\$ 140\) billion. c. decreasing taxes by \(\$ 40\) billion. d. increasing taxes by \(\$ 100\) billion.

To calculate the multiplier, use the following formula: \[Multiplier = \frac{1}{1 - MPC}\] Given that the MPC is \(0.90\), substitute into the formula: \[Multiplier = \frac{1}{1 - 0.90} = \frac{1}{0.10} = 10\]

With the multiplier calculated, we can determine the required change in government spending or taxes to prevent the increase in aggregate demand: \[Change\,in\,Fiscal\,Policy = \frac{Change\,in\,Aggregate\,Demand}{Multiplier}\] Substitute the values: \[Change\,in\,Fiscal\,Policy = \frac{900}{10} = 90\] A fiscal policy change of \(90\) billion is required to prevent the increase in aggregate demand. Now, let's investigate each of the given options to determine which one is correct.

a. increasing government spending by \(500\) billion: This would have a \(10 \times \$500=\$5000\) billion impact on aggregate demand, which is not required. b. increasing government spending by \(140\) billion: This would have a \(10 \times \$140=\$1400\) billion impact on aggregate demand, which is also not required. c. decreasing taxes by \(40\) billion: This would have a \(10 \times \$40=\$400\) billion impact on aggregate demand. It would not prevent the increase in aggregate demand, as the required policy change needs to have an impact of \(90\) billion. d. increasing taxes by \(100\) billion: This option would have a -\(10 \times \$100=-\$1000\) billion impact on aggregate demand. This means that it would prevent the increase in aggregate demand, but it would also create a decrease in aggregate demand that is larger than necessary. None of the given options exactly matches the required fiscal policy change of \(90\) billion. However, option (c) - decreasing taxes by \(40\) billion - comes closest to the required change, as it will soften the increase in aggregate demand compared to the original situation. Therefore, the best choice among these options is: **c. decreasing taxes by \(\$ 40\) billion.**