Suppose that the economy is in a state of equilibrium where Aggregate Demand (AD) equals Aggregate Supply
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Suppose that the economy is in a state of equilibrium where Aggregate Demand (AD) equals Aggregate Supply (AS), and the economy is producing at its full employment level. Suppose also that the government increases its spending by $100 billion. Assume that the economy has a marginal propensity to consume (MPC) of 0.8, and a tax rate of 0.3. Calculate the following:
(a) The initial level of equilibrium GDP (Y)
(b) The new equilibrium GDP (Y) after the government's spending increase
(c) The change in equilibrium GDP due to the government's spending increase
(d) The size of the government spending multiplier
(e) The size of the tax multiplier
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