(b) Suppose the government implements fiscal policy in order to achieve full-
employment output and the marginal propensity to consume is 0.75.
(i) Calculate the minimum change in government spending required to
increase aggregate demand by the amount of the output gap of $600
billion. Show your work.
(ii) Suppose instead the government wants to change taxes rather
than government spending. Calculate the minimum change in taxes
required to increase aggregate demand by the amount of the output
gap of $600 billion. Show your work.
(c) Assume instead the government takes no policy action to close the
output gap shown in part (a). Explain how the economy will adjust in the
long run.
