You are an economist for helpville. You must show your work on answers requiring a value as an answer.

________________________________________________________________________________________________________________

(a) The Marginal Propensity to Save in helpville is .40. Calculate helpville's GDP. (3 pts)

helpville in millions

Consumption Spending	$ 1,000
Government Spending	300
Investment Spending	100
Exports	100
Transfer Payments	60

(b) Suppose that income taxes decrease by $100 million. By how much will this change affect real GDP?

(c) Given your answer to 2 (b), calculate the maximum level (potential) of helpville's real GDP.

(d) helpville's government now decides to increase Xn, through a tariff reduction, by $100 million. Will this policy change make the potential change in helpville's real GDP larger than, smaller than, or equal to the change you identified in 2 (c). Explain.

Bonus: Why does an increase in government spending cause crowding out?