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Fiscal Policy Assume the economy is in a recession. The recessionary output gap has been identified as $500 billion dollars. The Federal Government wants to act to combat the recession. 1. (4 points) Past data suggests that a $10 million change in spending caused a $200 million change in total output. Use this information to calculate the Government Spending Multiplier. In one sentence, give a definition of the multiplier. 2. (6 points) Using your answer in part (1) calculate the marginal propensity to consume. Calculate the marginal propensity to save. In one sentence, define marginal propensity to consume. 3. (2 points) Assume the government wants to correct the entire recessionary gap as stated in the paragraph on the first page. By how much should the government attempt to increase output? 4. (8 points) Using your answer to (3), calculate the change in Government Spending needed to correct the recessionary output gap. 5. (8 points) Using your answer to (3), calculate the change in Taxes needed to correct the recessionary output gap.

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