Chapter9: Aggregate Demand
Section: Chapter Questions
Problem 5.11P
Related questions
Question
14
![The following exercises are based on the
Appendix to this chapter.
Answer exercises 11-14 on the basis of the
following information. Assume that equilibrium
real GDP is $800 billion, potential real GDP is
$950 billion, the MPC is .80, and the MPI is .40.
11. What is the size of the GDP gap?
12. How much must government spending increase to
eliminate the GDP gap?
13. How much must taxes fall to eliminate the GDP gap?
14. If government spending and taxes both change by the
same amount, how much must they change to eliminate
the recessionary gap?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fe90b5b39-f294-43ff-af89-be1b685df3a1%2Fe440025f-f531-4951-bc57-3423112d4030%2Fwglryod_processed.png&w=3840&q=75)
Transcribed Image Text:The following exercises are based on the
Appendix to this chapter.
Answer exercises 11-14 on the basis of the
following information. Assume that equilibrium
real GDP is $800 billion, potential real GDP is
$950 billion, the MPC is .80, and the MPI is .40.
11. What is the size of the GDP gap?
12. How much must government spending increase to
eliminate the GDP gap?
13. How much must taxes fall to eliminate the GDP gap?
14. If government spending and taxes both change by the
same amount, how much must they change to eliminate
the recessionary gap?
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
Step 1.
Potential GDP > Real GDP, so there is a recessionary gap which can be closed by increasing G or decreasing T.
Since balanced budget multiplier is 1,
Required increase in G = Required decrease in T = Recessionary gap
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