Problems 3. Draw the graph and label correctly Assume a simple closed economy, with an mpc equal to 0.75. The government has passed a balanced budget amendment. The economy goes into a recession, so the government increases government spending by 40 million to try to expand the economy. a. Calculate the change in output (AY) from the increase in government spending (AG). b. The balanced budget amendment requires the government to also raise taxes by 40 million. Calculate hange in output (AY) from the tax hike.

The classification of government spending as an investment or having an investment-effect depends on: a. How the spending affects current consumption. b. How the spending affects future productivity. c. How the spending affects current stock prices. d. How the spending affects future stock prices.

Refer to the graph for a private closed economy. At the $150-billion level of GDP: Select one: a. Aggregate expenditures are less than real GDP, so GDP will rise b. Aggregate expenditures are more than real GDP, so GDP will fall c. Aggregate expenditures are more than real GDP, so GDP will rise d. Aggregate expenditures will be equal to GDP, so there will be no change in GDP

Why is it important to budget? (Note: You may discuss it in personal level to government level).

14

3

15

Suppose the current price level in the economy is 150 and real GDP is$5t. Net exports fall by$1t. What must be true? A the price level is now more than 150 B SRAS shifts to the left (C) the price level is now less than 150 (D) SRAS shifts to the right

Consider the country of Sealand. The government wants to raise GDP by $60. It is known that MPS = 0.10. Which of the following could help the government achieve its objective? A. Reduce taxes collected by $6. B. need more information. OC. An increase in government expenditure by $12. D. All of the other answers are incorrect OE. An increase in government expenditure by $6.

3. What will happen to the size of the expenditure multiplier and the size of the tax multiplier when the marginal propensity to save (MPS) increases?