Assume that equilibrium real GDP is $800 billion. Potential real GDP is 950 billion, the MPC...

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Assume that equilibrium real GDP is $800 billion. Potential real GDP is 950 billion, the MPC...

Assume that equilibrium real GDP is $800 billion. Potential real GDP is 950 billion, the MPC IS .80, and the MPI is .40

If government spending and taxes both change by the same amount, how much must they change to eliminate the recessionary gap?

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Answer 1

Answer #1

Recessionary gap ($ billion) = Potential GDP - Real GDP = 950 - 800 = 150

To eliminate the gap, government spending should be increased, so tax also increases by same amount.

Since balanced budget multiplier (BBM) = 1, As per the BBM rule,

Increase in government spending = Increase in tax = Recessionary gap = $150 billion

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Answer 2

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Assume that equilibrium real GDP is $800 billion. Potential real GDP is 950 billion, the MPC...

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