Question

7. Recall that, based on the multiplier, we can have a larger change in the economy as a result of an increase in spending (or decrease).

a. current GDP of the United States?

b. Let's say that the current downturn is a recession that shrinks GDP by thirty percent. What will the gap in GDP between the new GDP and what potential output could be? (difference between new and old GDP)

c. Let's say that the people spend ninety five percent of each new dollar in new income they receive because times are tough. Find the MPC, MPS and the Multiplier.

d. Now, based on the mulitplier, how much should the government increase its spending to close this recessionary gap (identified in part b) and get the economy expanding again?

Answer 1

solution @ Current GDP of United States = $20.5 trillion (2018) World Bank Data 6 If GDP shrinks by 30% , then GDP (new) = $ 14.35 trillion crap between br.DP (new) and GDP Cold) = GDP ( old )- GDP (new) 20.5- 14.35 = $6.15 Avillion 6 7f dollar of each new people en new mps = spend ninety fine percent encome , mpc = 0.95 l-mpl = 0.05 multiflier = mes s oos - 20 Government enbenditure needed to fill the craf (401= ? hap = multiplier - Increase in trournment Expenditure (AG) 6:15 - 20 X AG AG = 6.15 20 AG = $0.306 trillion Crowerment needs to increase its spending by $0.306 trillion