3. In the long run, economies are expected to move toward equilibrium at the full-employment level of production. Governments, particularly in democratic countries with frequent elections, often try to use economic policy in the short-run to improve the nation's economy. Consider a country experiencing a recession.

A. The legislature is considering the use of fiscal policy measures to bring output up to the full-employment level. The government's commerce ministry has reported to the legislature that the nation's marginal propensity to consume is 0.8 and that RGDP is $200 billion below the full-employment level.

I. The Minister of Commerce recommends deficit spending to stimulate the economy. What increase in spending is necessary to bring the economy up to the full-employment level of output?

II. Legislative leaders favor a tax cut over a spending increase as a response to the recession. What size tax cut would bring the economy up to the full-employment level of output?

III. The country's president wants the legislature to pass a balanced-budget spending increase to end the recession. What increase in spending would be necessary to carry out the president's plan?