Explain the effect of an increase in government spending of $50 billion on the economy.?

Question

Assume that investment, net exports (X-M), and taxes do not change with a change in real GDP and the MPC is .75

Answer 1

ΔY/ΔG=1/(1-MPC)

ΔG=50

ΔY=50/(1-0.75)=50/0.25= +200 billion.

Answer 2

Ah economics...

The best I can give you is...

An increase in government spending would most likely cause a budget deficit. (spending more than they earn). This would also break any downturn the economy would be in.

Of course, economies are ran differently. Some stay close to the nations GDP while some soar way above it. Different sorts of macroeconomic management.