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Assume the marginal propensity to consume = .8, and government purchases increase by $.2 Trillion.
1. Potentially, how much will real GDP increase in the short-run after the increase in government purchases?
2. Besides government purchases, what and how much did another spending category increased due to the multiplier described above? Explain?
Under what conditions does the text explain that monetary policy is neutral? If it is neutral under these conditions, why is it still an important economic policy tool? Your answer
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