The federal government decides to stimulate the economy and increases government expenditure on new infrastructure projects by $40 billion.The marginal propensity to consume is MPC = 3/4 and the marginal propensity to import is MPI = 1/5.Suppose the crowding-out effect is twice the amount of government spending.
a. In a closed economy, what is the increase in output caused by the stimulus package of $40 billion?
b. What is the increase in output if the economy is open?

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The Answer of The federal government decides to stimulate the economy and increases government expenditure on new infrastructure projects by $40 billion.The marginal propensity to consume is MPC = 3/4 and the marginal propensity to import is MPI = 1/5.Suppose the crowding-out effect is twice the amount of government spending.
a. In a closed economy, what is the increase in output caused by the stimulus package of $40 billion?
b. What is the increase in output if the economy is open?

The Federal Government Decides to Stimulate the Economy and Increases