2) Assume the economy is in long-run equilibrium. Aggregate Demand then shifts left and the economy contracts by $50 billion. The government wants to change its spending in order to avoid a recession. If the crowding-out effect is always half as strong as the multiplier effect, and if the MPC equals 0.9, by how much does government purchases have to change?
This question was asked on May 08, 2010.
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