The federal government decides to stimulate the economy and increases government expenditure on new infrastructure projects by $10 billion. The marginal propensity to consume is MPC = .80 and the marginal propensity to import is MPI = .25. Suppose the crowding-out effect is twice the amount of government spending. a. In a closed economy, what is the increase in output caused by the stimulus package of $10 billion? b. What is the increase in output if the economy is open?

The federal government decides to stimulate the economy and increases government expenditure on new infrastructure projects by $10 billion. The marginal propensity to consume is MPC = .80 and the marginal propensity to import is MPI = .25. Suppose the crowding-out effect is twice the amount of government spending. a. In a closed economy, what is the increase in output caused by the stimulus package of $10 billion? b. What is the increase in output if the economy is open?

Macroeconomics

13th Edition

ISBN:9781337617390

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter11: Fiscal Policy And The Federal Budget

Section: Chapter Questions

Problem 18QP

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The federal government decides to stimulate the economy and increases government expenditure on new infrastructure projects by 110 billion. The marginal propensity to consume is MPC = 0.3 and the marginal propensity to import is MPI = 0.05. Suppose the crowding-out effect is twice the amount of government spending, what is the change in output caused by the stimulus package of 110 billion in a closed economy? Number
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