1. Presume there is an economy suffering from a recessionary gap of $900 billion and the MPC is .9.

a. Calculate how much this government will have to change it's spending by to close this output gap.

b. If the government decides to change taxes instead, how much will it have to change taxes to close this output gap?

2. Presume there is an economy suffering from a inflationary gap of $600 billion and the MPC is .75.

a. Calculate how much this government will have to change it's spending by to close this output gap.

b. If the government decides to change taxes instead, how much will it have to change taxes to close this output gap?

3. Briefly explain why the adjustment required in government spending is different than the adjustment required in taxes to close the output gaps.