THE AGGREGATE EXPENDITURE MODEL (IN THE SHORT RUN) YOU MUST SHOW YOUR CALCULATIONS IN THE SPACE BELOW FOR THE NEXT PROBLEM USE THE FOLLOWING FORMULA: CHANGE IN GDP = [ 1 / (1-MPC) ] * CHANGE IN G Initially, the economy is producing $13 trillion in goods and services and the government is spending $2 trillion.

Assume that the marginal propensity to consume is 0.7 (MPC=0.7).

Then the government decides to increase its spending to $2.7 trillion.

a) What is the value of the spending multiplier? (3 POINTS)

b) Compute the new equilibrium level of output. (7 POINTS)