4. Assume that a hypothetical economy with an MPC of .8 is experiencing severe recession. By how much would government spending have to rise to shift the aggregate demand curve rightward by $25 billion? How large a tax cut would be needed to achieve the same increase in aggregate demand? Determine one possible combination of government spending increases and tax increases that would accomplish the same goal without changing the amount of outstanding debt.

6. Some politicians have suggested that Canada enact a constitutional amendment requiring that the federal government balance its budget annually. Explain why such an amendment, if strictly enforced, would force the government to enact a contractionary fiscal policy whenever the economy experienced a severe recession.

7. Suppose that consumer spending initially rises by $5 billion for every 1 percent rise in household wealth and that investment spending initially rises by $20 billion for every 1 percentage point fall in the real interest rate. Also assume that the economy's multiplier is 4. If household wealth falls by 5 percent because of declining house values, and the real interest rate falls by two percentage points, in what direction and by how much will the aggregate demand curve initially shift at each price level? In what direction and by how much will it eventually shift?

8. Suppose economists observe that in a closed economy an increase in government spending of $10 billion raises the total demand for goods and services by $30 billion. (4 Marks) a) If these economists ignore the possibility of crowding out of investment, what would they estimate the marginal propensity to consume (MPC) to be? b) Now suppose the economists allow for crowding out. Would their new estimate of the MPC be larger or smaller than their initial one?