Problem Suppose the current U.S. economy is $400 billion below its potential level. The governmenm wants to close this gap by using fiscal policy. To eliminate the crowding out effect, the Federa Reserve agrees to adjust the money supply to hold the interest rate constant (i.e., there is no crowding out effect). Economists report that the marginal propensity to consume (MPC) is 0.8. According to Keynesian Economics, the price level is completely fixed in the short run. Q: In what direction (i.e., increase or decrease) and by how much would government spending need to change to close the outnut gan?

Problem Suppose the current U.S. economy is $400 billion below its potential level. The governmenm wants to close this gap by using fiscal policy. To eliminate the crowding out effect, the Federa Reserve agrees to adjust the money supply to hold the interest rate constant (i.e., there is no crowding out effect). Economists report that the marginal propensity to consume (MPC) is 0.8. According to Keynesian Economics, the price level is completely fixed in the short run. Q: In what direction (i.e., increase or decrease) and by how much would government spending need to change to close the outnut gan?

MACROECONOMICS FOR TODAY

10th Edition

ISBN:9781337613057

Author:Tucker

Publisher:Tucker

Chapter11: Fiscal Policy

Section: Chapter Questions

Problem 5SQP

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