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15 Mar 2019

suppose there is a $200 billion recessionary gap. If there are no taxes or imports to restore the economy back to potential GDP how much should government expenditure be changed if the marginal propensity to consume is 0.75? Does government expenditure need to be increased or decreased.

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Related questions

Imagine an economy in which consumer expenditure is represented by the following equation:

C=50+.75DI

Imagine also that investors want to spend 500$ at every level of income (I=500$), net exports are zero (X-IM=0), government purchases are 300$, and taxes are 200$

A. What is the Equilibrium price at GDP

B. If the potential GDP is 3000, is there a recessionary or inflationary gap? if so, how much?

C. What will happen to the equilibrium level of GDP if investors become optimistic about the country's future and raise their investment to 600$.

D. After the investment has increased to 600$, is there a recessionary or inflationary gap? How Much?

1. Suppose the multiplier in a given economy is 2.5. If government spending increases by 10, how much will GDP increase by?

10 * 2.5 = 25

2. Again, suppose the multiplier is 2.5. If investment spending falls by 4, what will be the change in GDP?

- Invetment spending falls by 4 --> - 4

2.5 * - 4 = - 10

3. Again, suppose that the multiplier for a given economy is 2.5. The authorities believe that GDP is currently below potential, and would like it to increase by 5. How much should they raise government spending to bring this about?

2. 5 * ___ = 5 ---> 5/2 = 2

Government spending should raise to 2

4. Suppose the marginal propensity to consume in an economy is equal to 0.75. What is the marginal propensity to save?

mpc = 0.75

marginal propensity to save = 1 - 0.75 = 0.25

5. Again, suppose the marginal propensity to consume is 0.75. If GDP increases by 20, what is the change in consumption?

mpc = 0.75

GDP (Y) = 20

C = 0 + 0.75 * 20 = 15

6. Suppose the marginal propensity to consume in an economy is equal to 0.75. If there were no taxes and no foreign trade, what would the multiplier be?

mpc = 0.75

1 - 0.75 = 0.25

0.25 รขย€ย”> 1/4

1 / 1/4 = 4/1 = 4

multiplier = 4

* I would like to know if my answers are correct and if I used the correct formulas to find the answers. Thank you.

You are given the following information about the economy: autonomous consumption = $300 billion planned investment = $300 billion government spending = $500 billion mpc = .8 imports = $200 billion exports = $500 billion

a. If full employment Y = $6000 billion, is there a recessionary or inflationary gap?

b. If full employment Y = $6000 billion, what is the GDP gap?

c. What kind of fiscal policy (expansionary or contractionary) could help the economy close the gap?

d. If you decided to change government spending, how much would you change G to close the GDP gap?

e. If the value of the dollar depreciated, how would this affect net exports? AD?

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