Problem 2. An economy is operating with output $408 billion below its natural rate, and fiscal policymakers want to close this recessionary gap. The central bank agrees to adjust the money supply to hold the interest rate constant, so there is no crowding out. The marginal propensity to consume is 0.9, the marginal propensity to import is 0.1, and the tax rate is 0.05. The price level is completely fixed in the short run. In what direction and by how much would government spending need to change to close the recessionary gap? _____________ Explain your thinking in the AE graph and in words._____________
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