Assume that political instability around the world causes American business firms to decrease business investment signaling the start of a recession in the economy.
a. How would a recession impact the federal budget?
b. If real GDP drops to $800 billion while potential GDP is $1,200 billion and the marginal propensity to consume is .75, then
i. Calculate the minimum change in government spending that could close the recessionary gap. Show your work.
ii. Calculate the minimum change in personal income taxes that could close the recessionary gap. Show your work.
c. How will the change in real interest rates caused by either action in part B impact economic growth in the United States?