In what direction and by how much must government spending change to close the recessionary gap? Explain your thinking.
A. Is expansionary fiscal policy more likely to lead to a short-run increase in investment
a. when the investment accelerator is large or when
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b. when the interest sensitivity of investment is large or when it is small? Explain.
B. Consider an economy described by the following equations:
C. An economy is producing output $400 billion less than the natural level of output, 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 4 5, and the price level is completely fixed in the short run. In what direction and by how much must government spending change to close the recessionary gap? Explain your thinking.
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