In the country of Borealis, the minimum amount of consumption spending that will occur is $300 - that is, no matter what level of income households have, the aggregate amount of consumption spending in the economy will be at least $300. In addition, for every extra dollar of national income, consumption spending will increase by $0.75.

Planned investment spending in Borealis is $100, and Government spending on goods and services is also $100. Taxes, transfers, exports and imports all equal zero.

a.Write out the planned Aggregate Expenditure function for Borealis.

b.Solve for the income-expenditure equilibrium level of real GDP. (Note: in addition to providing a numerical answer, you must show your work. You may use either a table or algebra to arrive at your answer. If you want to use a table, you may fill in Table 2 on p. 7. If you use the table, you do not need to fill in all of the blank cells. You may just fill in enough cells to help you arrive at your answer.)

The economic advisers to the President of Borealis calculate that Borealis' potential real GDP is $3,000. The state of Aggregate Demand and Aggregate Supply in the economy is depicted in Figure 2 on p. 6. The president informs her advisers that she would like to use expansionary fiscal policy to push the economy closer to its potential.

c.What is the value of the multiplier in Borealis?

d.What are the three tools of fiscal policy the president could use to stimulate expenditure? In your answer, be sure to indicate which of the three categories of aggregate expenditure (i.e. C, I or G) each fiscal policy tool would primarily affect.

e.Suppose the President decides to increase government spending on goods and services from $100 to $350. If prices remain fixed, what would be the new income-expenditure equilibrium real GDP? (Note: in addition to providing a numerical answer, you must show your work. You may use either a table or algebra to arrive at your answer. If you want to use a table, you may fill in Table 3 on p. 7. If you use the table, you do not need to fill in all of the blank cells. You may just fill in enough cells to help you arrive at your answer.)

f.Will the increase in government spending on goods and services to $350 be enough to close the recessionary gap? Explain your answer, being sure to mention the significance of the upward-sloping short-run aggregate supply curve and the aggregate price level