Problem on tax and spend at possible level of GDP

Question

Refer to columns 1 and 6 of the tabular data given below. Incorporate government in the table by supposing that it plans to tax and spend $20 billion at every possible level of GDP. 

 

Answer 1

Before G is added, open private sector equilibrium will be at $350.  The addition of government expenditures of G to our analysis raises the aggregate expenditures (C + I_g +X_n + G) schedule and increases the equilibrium level of GDP as would an increase in C, I_g, or X_n.  Note  down that modification in government spending are subject to the multiplier effect.  Government spending supplements private investment and export spending (I_g + X + G), rising the equilibrium GDP to $450.