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

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

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) HELPvilles government now decides to increase Xn, through a tariff reduction, by $100 million. Will this policy change make the potential change in HELPvilles 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?