14. If government spending same amount, how much must they change to eliminate the recessionary gap? and taxes Both ehange By

ECON MACRO
5th Edition
ISBN:9781337000529
Author:William A. McEachern
Publisher:William A. McEachern
Chapter9: Aggregate Demand
Section: Chapter Questions
Problem 5.11P
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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?
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
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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