Suppose the Federal Government Decides to Stimulate the Economy and Increases

Essay

Suppose the federal government decides to stimulate the economy and increases government expenditure on new infrastructure projects worth $40 billion. The marginal propensity to consume is MPC = 2/3 and the marginal propensity to import is MPI = 1/5. Suppose also that the crowding-out effect is twice the amount of government spending.
a.In a closed economy, what is the increase in output caused by the stimulus package of $40 billion?
b.What is the increase in output if the economy is open?