Homework Answers
6-4. The money supply would change because of the multiplier effect created by the initial deposit.
6-5.
Real GDP is $2,000 and full employment GDP is $1,500. So, the GDP needs to fall by $500 in order to reach full employment.
The multiplier is 4; this means, when government spending falls by $1, the GDP falls by $4. So, in order to lower GDP by $500, the government spending needs to fall by $500/4 = $125.
So, change in government spending = -$125. (The negative sign is because government needs to reduce spending).
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