Estimate the GDP impact of a positive change in government spending that equals $25 billion.

(a.) (15 points) Suppose your local Congress representative suggests that the federal government should NOT intervene in the baseball ticket market to stop runaway price increases. Would you say that this view basically supports the Keynesian or the Monetarist school of thought? Why? What position would the opposing school of thought take on this issue? (Be brief — you can answer this in 2 or 3 brief paragraphs).

(b.) (10 points) Any change in the economy’s total expenditures would be expected to translate into a change in GDP that was larger than the initial change in spending. This phenomenon is known as the multiplier effect. Explain how the multiplier effect works.

(c.) (15 points) You are told that 75 cents out of every extra dollar pumped into the economy goes toward consumption (as opposed to saving). Estimate the GDP impact of a positive change in government spending that equals $25 billion. (Points : 40)

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