An economy is initially at full employment, but a decrease in planned investment spending (a component of autonomous expenditure) pushes the economy into recession. Assume that the mpc of this economy is 0.75 and that the multiplier is 4.

(LO4, LO5)

a. How large is the recessionary gap after the fall in planned investment?

b. By how much would the government have to change its purchases to restore the economy to full employment?

c. Alternatively, by how much would the government have to change taxes?

d.* Suppose that the government’s budget is initially in balance, with government spending equal to taxes collected. A balanced-budget law forbids the government from running a deficit. Is there anything that fiscal policymakers could do to restore full employment in this economy, assuming they do not want to violate the balanced-budget law?