Suppose a country's economy is initially in equilibrium with an aggregate demand (AD) curve and an aggregate supply (AS) curve intersecting at a price level of 100 and a real GDP of 5,000. The government wants to increase real GDP to 6,000 by increasing government spending, and decides to increase it by $100 million.

a) What is the initial equilibrium level of government spending?
b) What is the initial marginal propensity to consume (MPC)?
c) What is the new equilibrium level of real GDP?
d) What is the new equilibrium price level?
e) What is the size of the fiscal multiplier for this economy?

Assume that the economy is closed, and that the marginal propensity to consume is 0.75.

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The detailed answer for the above question is provided below a The initial equilibrium level of government spending can be determined by finding the p... View the full answer