1. Explain the effects of the following actions on equilibrium income (Assume that the marginal propensity to consume is 0.8).

a. Government purchases rise by $10 billion.

b. Taxes fall by $10 billion.

2. Explain how fiscal policy can be used to close the (a) contractionary gap and (b) inflationary gap.

3. Why does a larger government budget deficit increase the magnitude of the crowding-out effect?

4. When an economy is already at full employment, what is the outcome of expansionary fiscal policies to employment, inflation, real output, and deficits (assuming no changes in tax rates)?

5. How serious is the national debt to our economic stability?