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1. Assume the United States economy is operating at full-employment output and the government has a balanced budget. A drop in consumer confidence reduces consumption

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1. Assume the United States economy is operating at full-employment output and the government has a balanced budget. A drop in consumer confidence reduces consumption spending, causing the economy to enter into a recession. (a) Using a correctly labeled graph of the short-run Phillips curve, show the effect of the decrease in consumption spending. Label the initial position "A" and the new position "B." (b) What is the impact of the recession on the federal budget? Explain. (c) Assume that current real gross domestic product falls short of full-employment output by $1 Trillion and the marginal propensity to consume is 0.9. (i) Calculate the minimum increase in government spending that could bring about full employment. (ii) Assume that instead of increasing government spending, the government decides to reduce personal income taxes. Will the reduction in personal income taxes required to achieve full employment be larger or smaller than the government spending change you calculated in part (c) (i)? Explain. (iii) Calculate the minimum amount of personal income tax cut that would be required to return the economy into long-run equilibrium

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