QUESTION 1 During 2020, the global economy experienced a severe recession. To deal with recessionary gaps in their economies, many countries implemented expansionary fiscal policies to increase aggregate expenditures. Consider the following hypothetical responses (the actual policies were different in each country). In 2020, the government of the United States introduced a $1,000 billion stimulus package - additional government expenditures with no changes to the tax system. In Canada, the tax rate was reduced from 33 percent of GDP to 26 percent of GDP at a cost of about $100 billion. Both policies cost a similar nominal dollar value per capita. QUESTION 1a) (2 Points) For each country, use the Desired Aggregate Expenditure and Actual National Income framework to illustrate (with a diagram) the impact of each policy on equilibrium expenditure and income. Explain how the government's new policy alters equilibrium income. Do a separate illustration for each country. Be sure to label each axis, all equilibrium points and every line or curve. Show the initial equilibrium, show how the policy changed Aggregate Expenditure and show the new equilibrium after the policy was introduced. QUESTION 1b) (2 Points) In 2020 (before the new policies from question la were introduced), Canada and the United States had the following desired aggregate expenditure functions ($billions) Canada USA Consumption 377+0.62*YD 2559+0.75*YD Investment 303 3,167 Government 407 3,860 Exports 538 808'T Imports 0.3*Y 0.14*Y GDP (Y) 1,837 19,477 Tax rate 0.33 0.26 Marginal propensity to consume 0.62 0.75 Marginal propensity to import 0.3 0.14 Disposable Income (YD) YD = (1-0.33)*Y YD = (1-0.26)*y Potential GDP (Y*) 2,056 21,800 For each country calculate the multiplier in 2020 before the policy change. Assuming that the policy changes in 2020 are the only changes that take place in the Canadian and US economies, calculate the multiplier in 2020 after the policy change. Explain any differences in the multiplier after the policy change in each country. Explain the differences in multipliers between the two countries. Equations for multiplier : Multiplier = 1-MPC*(1-t)+m MPC is the marginal propensity to consume (see consumption equation in the table above) t is the tax rate (in the table above) m is the marginal propensity to import (it's in the imports equation in the table above) Yo = (1-t)*Y, where Yo is disposable income