Homework Answers
A) as AE< real output , so recessionary gap
= 20 billion shortfall of output
AE should rise by 20 billion
Multiplier= ∆Y/∆in AE
= 50/40
= 1.25
b) inflationary gap
AE should fall by 20 billion
Multiplier= 1.25
C) MPC = .2
MPS = .8
Multiplier = 1/MPS = 1.25
MPS = 4/5 = .8
MPC = 1-MPS = .2
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(You must show all steps of your calculations to get credit
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marks)
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