Assume an economy that consists of consumers, government, business investors, and an international sector. We will express this economy this way: C + I + G + X = GDP.

Assume the MPS is 0.4.

How much can we expect the economy to expand if government increases its spending by $200B and at the same time, Congress imposes a tax increase of the same amount ($200B) to pay for the increased spending and that tax increase causes C to fall by $120B?

Show your work.

Hint: You have to calculate the multiplier and apply it appropriately. Determine the effect of the fall in C on GDP. Determine the effect of the increase in government spending on GDP. What is the net result?