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1) If the MPS is 0.25 and the economy has a recessionary gap of $5 billion, what is the size of the GDP Gap?

1) If the MPS is 0.25 and the economy has a recessionary gap of $5 billion, what is the size of the GDP Gap?

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?

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