1. For each of the following calculate each of the multipliers and determine how a 100 billion dollar increase in government spending would affect total spending in the economy:
MPC = 0.75
MPS = 0.40
MPC = 0.90
2. The economy of Littleton is currently producing 1 trillion dollars less than their full employment GDP level of 5 trillion dollars. Assuming the government chooses to utilize fiscal policy and adds 500 billion dollars of new spending, and they have a MPC of .80, perform the following:
a. Does this represent expansionary or contractionary fiscal policy?
b. Determine the spending, tax, and balanced budget policy multiplier.
c. Identify the autonomous change necessary for each type of policy.
d. Identify the induced change for each type of policy.
e. Identify the total change for each type of policy.
f. Illustrate the pre and post fiscal policy situation using the AD/AS model.
g. Assuming Crowding out or Ricardian Equivalence, what will change?
h. Assuming government borrows the money to engage in the new spending, what is likely to happen to:
i. Interest rates (increase or decrease)?
ii. The value of the dollar (appreciate or depreciate)?
iii. How would each of these impact C, I, G, & NX
iv. What would be the effectiveness of the fiscal policy as a result of the borrowing (amplify or diminish)?