Question

An economy is operating with output $400 billion below its natural level, and fiscal policymakers want to close this recessionary gap. the central bank agrees to adjust the money supply to hold the interest rate constant, so there is no crowding out. the marginal propensity to consume is , and the price level is completely fixed in the short run. to close the recessionary gap, the government would need to spending by $ billion.

Answer 1

To close the recessionary gap, the government need to increase spending by 80 Billion Dollars. If the central bank agrees to adjust the money supply to hold the interest rate constant, so there is no crowding out. the marginal propensity to consume is 4/5 , and the price level is completely fixed in the short run.