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1. Explain the effects of the following actions on equilibrium income (Assume that the marginal propensity...

1. Explain the effects of the following actions on equilibrium income (Assume that the marginal propensity to consume is 0.8).

a. Government purchases rise by $10 billion.

b. Taxes fall by $10 billion.

Explain how fiscal policy can be used to close the (a) contractionary gap and (b) inflationary gap.

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Answer #1

rise in (a) Due to to the government puchase, the AD Curve shifts leads to increase in equilibrium level of income. 7 - 0.8 C

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