Problem
1. In a certain economy, the multiplier for government purchases is 2 and the multiplier for changes in fixed taxes is 1.5. The government then proposes to raise both spending and taxes by $100 billion. What should happen to equilibrium GDP on the demand side?
2. (More difficult) Suppose real GDP is $10,000 billion and the basic expenditure multiplier is two. If two tax changes are made at the same time:
a. fixed taxes are raised by $100 billion,
b. the income-tax rate is reduced from 20 percent to 18 percent, will equilibrium GDP on the demand side rise or fall?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.