Question 1)Suppose the Australian government has decided to increase its purchases by $1 billion. Assume the Marginal Propensity to Consume (MPC) is constant and equal to 0.8.

a.How much will Real GDP increase as a result of the above increase in government purchases?

b.Explain clearly, with the help of a flow chart, the process through which Real GDP will increase.

c.In the real world, the increase in Real GDP will be less than predicted in this question. Identify and explain the reasons why the increase in Real GDP will be lower than expected.