In each of the following cases, either a recessionary or an inflationary gap exists. Assume that the aggregate supply curve is horizontal, so that the change in real GDP arising from a shift of the aggregate demand curve equals the size of the shift of the curve. Calculate both the change in government purchases of goods and services and the change in government transfers necessary to close the gap. a) Real GDP equals $100 billion, potential output equals $160 billion, and the marginal propensity to consume is 0.75. b) Real GDP equals $250 billion, potential output equals $200 billion, and the marginal propensity to consume is 0.5. c) Real GDP equals $180 billion, potential output equals $100 billion, and the marginal propensity to consume is 0.8
The task I am struggling with:
In each of the following cases, either a recessionary or an inflationary gap exists. Assume that the
a) Real GDP equals $100 billion, potential output equals $160 billion, and the marginal propensity to consume is 0.75.
b) Real GDP equals $250 billion, potential output equals $200 billion, and the marginal propensity to consume is 0.5.
c) Real GDP equals $180 billion, potential output equals $100 billion, and the marginal propensity to consume is 0.8
Thank you very much for your help.
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