4. Suppose economists observe that in a closed economy an increase in government spending of $10 billion

Question:

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

a. If these economists ignore the possibility of crowding out of investment, what would they estimate the marginal propensity to consume (MFC) to be?

b. Now suppose the economists allow for crowding out. Would their new estimate of the MFC be larger or smaller than their initial one?

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