To counter the recessionary pressure resulting from Covid-19 pandemic, on March 25, 2020,

Bangladesh government announced a stimulus package of Tk. 5,000 crore for export-oriented

industries which could only be disbursed in the form of salaries and wages for employees and

workers of the industries. Suppose that the marginal propensity to consume (MPC) of the people

of Bangladesh is 80%, proportional income tax rate is 10% and marginal propensity to import is

10%.

(a) If price level remains constant, by how much will equilibrium real GDP of Bangladesh

increase in response to the government stimulus package?

(b) By how much and in what direction will the Aggregate Demand (AD) curve shift?

(c) Now suppose that price level is not constant, i.e., Short Run Aggregate Supply (SRAS)

curve is upward sloping. Without giving a precise numeric answer, what is the effect of a

variable price level on the Aggregate Expenditure (AE) curve? What is the effect on the AD

curve?