The government notices that there is an output gap and decides to increase government spending with a stimulus package of $4 trillion in hopes that it will spur growth and stop unemployment.

1. What is the new level of GDP (as determined by aggregate expenditure)?

2 Calculate the Keynesian Multiplier.

The price level now adjusts to get us to a new short-run equilibrium.

3 What is the new short-run equilibrium (price level and GDP)?

4 What is the new output gap?

5 Assume that the government is done spending (as is other autonomous expenditure items).  What must change to get us to long-run equilibrium?