1. Country X is initially producing at its potential level so that real GDP equals Y*, the full-employment output. It is a closed economy without international trade.

a) If the government uses an expansionary fiscal policy by raising government purchase, what are the effects on price and real output in the long run?

b) With reference to your answer in part (a), is there crowding out in this economy?

c) Do you think Keynes would worry about the possibility of crowding out? Why or why not?