Suppose that the economy is in recession with a recessionary gap of $1 trillion. The MPC is 0.9 and the tax rate on income is 30%. Answer the...

The first
thing necessary here is to calculate the multiplier, which is defined as 1/1-MPC. This number
will give us how much money goes into the economy based on every dollar the Federal government
gives out or spends. The MPC, or marginal propensity to consume, is the percentage of each
dollar that will be spent from what a person receives.

So, the multiplier is
1/(1-0.9), or 10. Therefore, for every dollar the government spends, the economy will increase
ten dollars. The AS curve defines inflation, so if it is flat, there is little or no inflation.
Therefore, the money infused into the economy from the governments spending would all be
realnone would be influenced by inflation. To successfully curb the recession, the government
would have to spend $100 billion.

Now, if there is...