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1.If the marginal propensity to consume were 0.5, how much would government spending have to rise in order to raise output by $1000 billion?
2. Suppose that government policymakers decide that they will change taxes to raise aggregate output by $400 billion, and mpc = 0.5. By how much will taxes have to be changed?
3. What happens to aggregate output if both taxes and government spending are lowered by $300 billion and mpc = 0.5? Explain your answer.
4. Will aggregate output rise or fall if an increase in autonomous consumer expenditure is matched by an equal increase in taxes?
5. If a change in the interest rate has no effect on planned investment spending, trace out what happens to the equilibrium level of aggregate output as interest rates fall. What does this imply about the slope of the IS curve?
6. Using a supply and demand diagram for the market for money, show what happens to the equilibrium level of the interest rate as aggregate output falls. What does this imply about the slope of the LM curve? 7. If the point describing the combination of the interest rate and aggregate output is not on either the IS or the LM curve, the economy will have no tendency to head toward the intersection of the two curves. Is this statement true, false, or uncertain? Explain your answer.
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