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ANALYZE THE ISSUE Assume $100 billion is spent on infrastructure this year, and this spending is entirely funded by raising taxes (which might include gas taxes, collecting tolls, imposing user fees, or other forms of taxation) of $ 100 billion. Use the Keynesian aggregate expenditures model to explain the impact on real GDP. Assume the MPC = 0.90, the economy is initially in equilibrium at $18 trillion, and there is a recessionary gap equal to $100 billion. What will the new equilibrium level of real GDP be equal to? Will this infra-structure spending, financed by raising taxes of an equal amount, be sufficient to close the recessionary gap?

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Economics For Today

10th Edition
Tucker
Publisher: Cengage Learning
ISBN: 9781337613040
BuyFind

Economics For Today

10th Edition
Tucker
Publisher: Cengage Learning
ISBN: 9781337613040

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Chapter 19.4, Problem 1YTE
Textbook Problem

ANALYZE THE ISSUE Assume $100 billion is spent on infrastructure this year, and this spending is entirely funded by raising taxes (which might include gas taxes, collecting tolls, imposing user fees, or other forms of taxation) of $ 100 billion. Use the Keynesian aggregate expenditures model to explain the impact on real GDP. Assume the MPC = 0.90, the economy is initially in equilibrium at $18 trillion, and there is a recessionary gap equal to $100 billion. What will the new equilibrium level of real GDP be equal to? Will this infra-structure spending, financed by raising taxes of an equal amount, be sufficient to close the recessionary gap?

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