The Canadian economy slowed significantly in 2008, and policy-makers were extremely concerned about lack of growth. To boost the economy, the House of Commons adopted the Economic Action Plan in January 2009. This plan delivered about $64 billion in additional government spending into the economy. Assume, for the sake of argument, this spending was in the form of payments made directly to consumers. The objective was to boost the economy by increasing the disposable income of Canadian consumers.

a. Calculate the initial change in aggregate consumer spending as a consequence of this policy measure if the marginal propensity to consume (MPC) in Canada is 0.5. Then calculate the resulting change in real GDP arising from the $64 billion in payments.

b. Illustrate the effect on real GDP with the use of a graph depicting the income–expenditure equilibrium. Label the vertical axis “Planned aggregate spending, AE_Planned” and the horizontal axis “Real GDP.” Draw two planned aggregate expenditure curves (AE_Planned1 and AE_Planned2) and a 45-degree line to show the effect of the autonomous policy change on the equilibrium.