Suppose the economy is in recession. Policymakers estimate that aggregate demand is $100 billion short of the amount necessary to generate the long run natural rate of output. That is, if aggregate demand were shifted to the right by $100 billion, the economy would be in  long run equilibrium.  a.Explain the impact on the economy if the government chooses to use fiscal policy to stabilize  the economy and the marginal propensity to consume (MPC) is given as 0.75 with no crowding  out.  b.If there is a crowding out effect and investment is very sensitive to changes in the interest rate,  should the government increase spending more or less than this amount?

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Q: structions: Enter your answers as a whole number. How much does aggregate demand need to change to…

A:

Q: Suppose economists observe that an increase in government spending of $11 billion raises the total…

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A: The value of MPC can be calculated as follows. The value of MPC is 0.883721.

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Q: and

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Fiscal Policy and Money Market

Fiscal policy is one of the important tools that is used by the government to control inflation or aggregate demand in the economy. Under this policy, there are two rules which are used by the government, one is the expenditure of the government and the other is the taxation or income of the government which it collects from the public.