2. Say that an economy has consumption of $40bn plus 50% of disposable income, taxes equal to 10% of income, investment spending of $40bn, government spending of $80bn, exports of $10bn, and imports equal to 10% of disposable income.

a) What is the GDP in this economy in macroeconomic equilibrium? Show your work. What kind of government activity is or is not included in 'government spending' in this kind of calculation and why?

b) The multiplier in this economy turns out to be equal to 1.5625. Based on this, if government spending was increased by $10bn dollars, what would ultimately end up happening to GDP? Explain your answer and illustrate it with a Keynesian cross diagram.

c) In the real world, research suggests that marginal propensity to consume is typically lower for households with higher income than it is for households with lower income. Based on that, consider (i) an increase in the amount of government payments to unemployed people, (ii) an reduction in the rate of capital gains tax, and (iii) stimulus checks sent to every person in the economy. Assuming all three options resulted in the same total change in disposable income, what would be the relative size of the ultimate effect on GDP from each policy? Defend your answer.