Q. Assume that economists observe that in a closed economy an increase in government spending of $10 billion raises total demand for goods and services by $30 billion.

* If se economists ignore possibility of crowding out, illustrate what would y estimate marginal propensity to consume (MPC) to be?

* Now assume that economists allow for crowding out. Would their new estimate of MPC be larger or smaller than their initial one?
Assume that government of a closed economy reduces taxes by $20 billion, that re is no crowding out and that marginal propensity to consume is 3/4.

* Illustrate what is initial effect of tax reduction on aggregate demand?

* Illustrate what additional effects follow this initial effect? Illustrate what is total effect of tax cut on aggregate demand?

* How does total effect of this $20 billion tax cut compare with total effect of a $20 billion increase in government purchases? Why?