Question

Suppose that real GDP is currently 51.47 trillion potential GDP is $1.53 trillion, the government purchases multiplier is 2, and the tax multiplier is -15 a. Holding other factors constant, government purchases will need to be increased by $ 0.03 trillion to bring the economy to equilibrium at potential GDP (Round fo four decimal places as needed.) b. Holding other factors constant, taxes have to be cut by $ 0.04 trillion to bring the economy to equilibrium at potential GDP (Round to four decimal places as needed.) c. Construct an example of a combination of increased government spending and tax cuts that will bring the economy to equilibrium at potential GDP The combination of increasing government spending by and cutting taxes by trillion will bring the economy to equilibrium at potential GDP (Round to four decimal places as needed) 50.1200 trillion 50 0900 trillion S0.0600 trillion 50 0060 trillion

help with part c please!!!

Answer 1

Real GDP = $1.47 trillion

Potential GDP = $1.53 trillion

Government multiplier = 2

Tax multiplier = -1.5

Output gap = Potential GDP- Real GDP = $(1.53- 1.47) trillion = $0.06 trillion

(a) To bring the economy to equilibrium at potential GDP , government spending would increase by $0.06 trillion/2 = $0.03 trillion.

(b) To bring the economy to equilibrium at potential GDP , taxes would cut by ($0.06 trillion/1.5)= $0.04 trillion.

(c) If government spending increases by $0.0060 trillion , this will increase GDP by (0.0060)(2)= $0.012 trillion and decrease in taxes by $ 0.032 trillion , this will increase GDP by (0.032)(1.5)= $0.048 trillion. So, in total the GDP will increase by $(0.012+0.048) = $0.06 trillion which will bring the economy to equilibrium at potential GDP.

For simple example : Just half the increase in government spending and cut in taxes . That is increase government spending by $0.03/2 = $0.015 trillion and cut in taxes by $(0.04/2) = $0.02 trillion . The overall increase in GDP because of this combination of increase in G and cut in T , we get (2)(0.015) + (1.5)(0.02) = $(0.03+0.03)= $0.06 trillion, this will remove the output gap and  bring the economy to equilibrium at potential GDP.