Macroeconomics 1st Edition by Dean Karlan,Jonathan Morduch

Exercise 3

During the recent recession sparked by financial crisis, the U.S. economy suffered tremendously. Suppose that, due to the recession, the U.S. GDP dropped from $14 trillion to $12.5 trillion. This decline in GDP was due to a drop in consumption of $1 trillion and a drop in investment of $500 billion. The U.S. government, under the current president, responded to this recession by increasing government purchases.
a. Suppose that government spending had no impact on consumption, investment, or net exports. If the current presidential administration wanted to bring GDP back up to $14 trillion, how much would government spending have to rise?
b. Many economists believe that an increase in government spending doesn't just directly increase GDP, but that it also leads to an increase in consumption. If government spending rises by $1 trillion, how much would consumption have to rise in order to bring GDP back to $14 trillion?