In 2015, the U.S. federal government increased government spending (G) by $56 billion. This question has you both illustrate and explain the short- and long-run effects of these fiscal adjustments.
(a) Using the short-run model, show the impact of increased government spending on the inflation rate and short-run output.
(b) On the diagram(s) above, show how the central bank would respond to the increase in government spending.
(c) In terms of the short run model, how did the increase in G impact the other components of spending (C, I, and NX)?
(d) In terms of the basic growth (Solow) model, what does the increase in G mean for eoconomic growth? Be clear.