1.Explain the effects of the following actions on equilibrium income (Assume that the marginal propensity to consume is 0.75).

a.Government purchases rise by $40 billion

b.Taxes fall by $40 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.Discuss some of the challenges associated with expansionary fiscal policy (not less than 300words).