Assume that equilibrium real GDP is $800 billion. Potential real GDP is 950 billion, the MPC...

Question

Question

Assume that equilibrium real GDP is $800 billion. Potential real GDP is 950 billion, the MPC...

Assume that equilibrium real GDP is $800 billion. Potential real GDP is 950 billion, the MPC IS .80, and the MPI is .40

If government spending and taxes both change by the same amount, how much must they change to eliminate the recessionary gap?

business economics

Add a comment Improve this question Transcribed image text

Answer 1

Answer #1

Recessionary gap ($ billion) = Potential GDP - Real GDP = 950 - 800 = 150

To eliminate the gap, government spending should be increased, so tax also increases by same amount.

Since balanced budget multiplier (BBM) = 1, As per the BBM rule,

Increase in government spending = Increase in tax = Recessionary gap = $150 billion

Add a comment

Answer 2

Similar Homework Help Questions

Assume that equilibrium real GDP is $ 800 billion, potential real GDP is $ 950 billion,...

Assume that equilibrium real GDP is $ 800 billion, potential real GDP is $ 950 billion, the MPC is .80, and the MPI is .40. a. How much taxes fall to eliminate the GDP gap? b.If government spending and taxes both change by the same amount, how much must they change to eliminate the recessionary gap?
Assume the government cuts taxes by $200 billion. If the MPC is 0.8, what is the maximum potential impact on real GDP according to the simple Keynesian model?

Assume the government cuts taxes by $200 billion. If the MPC is 0.8, what is the maximum potential impact on real GDP according to the simple Keynesian model? Real GDP increases by $1,000 billion Real GDP Increases by $800 billion Real GDP decreases by 51.000 billion Real GDP decreases by 5000 buttonIn Keynesian theory, if the marginal propensity to consume is 0.90 and government spending is increased by $50 billion, then real income (GDP) will maximum of billion by a decrease: $500 decrease $50 Increase: $500 Increase: $50
Suppose that real GDP is currently $13.88 trillion and potential real GDP is $14.0 trillion, or...

Suppose that real GDP is currently $13.88 trillion and potential real GDP is $14.0 trillion, or a gap of $1,000 billion. The government purchases multiplier is 3.3, and the tax multiplier is 2.3. Holding other factors constant, by how much will government purchases need to be increased to bring the economy to equilibrium at potential GDP? Government spending will need to be increased by $___ billion. (Enter your response rounded to the nearest whole number.) Holding other factors constant, by...

Question 14 6 pts Assume the government cuts taxes by $250 billion. If the MPC is...

Question 14 6 pts Assume the government cuts taxes by $250 billion. If the MPC is 0.8, what is the maximum potential impact on real GDP according to the simple Keynesian model? Real GDP decreases by $1,000 billion Real GDP decreases by $1.250 billion Real GDP increases by $1,000 billion Real GDP increases by $1.250 billion D Question 15 6 pts in Keynesian theory, if the marginal propensity to consume is 0.90 and government spending is increased by $40 billion,...
#6 Consider an economy that is operating at the full-employment level of real GDP with MPC=0.7...

#6 Consider an economy that is operating at the full-employment level of real GDP with MPC=0.7 MPC=0.7 . The short-run effect on equilibrium real GDP of a $50 billion increase in government spending ( G G ), balanced by a $50 billion increase in taxes, is...…………. abillion (Increase or Decrease) in real GDP. #7 Suppose that the MPC in a country is 0.9. Complete the following table by calculating the change in GDP predicted by the multiplier process given each...
Investment Problem: 1. Assume the MPC is 3/4, if investment spending increase by $50 billion, the...

Investment Problem: 1. Assume the MPC is 3/4, if investment spending increase by $50 billion, the level of GDP will: 2. Assume the MPC is 2/3, if investment spending decreases by $30 billion, the level of GDP will: Export Problem: 3. If the multiplier in an economy is 4, a $50 billion increase in exports will: 4. If the multiplier in an economy is 3,a $30 billion decrease in exports will: Balanced Budget Problem: 5. If the MPC is .75...

The economy is in equilibrium, TP = TE, and Real GDP is $2,000 billion. The MPC...

The economy is in equilibrium, TP = TE, and Real GDP is $2,000 billion. The MPC is 0.75, the multiplier is operative, and idle resources exist at each expenditure round. Autonomous investment spending falls by $10 billion. As a result, the TE curve shifts __________, inventory levels unexpectedly __________, business firms __________ the quantity of goods and services they produce, and Real GDP __________ by __________. downward; rise; decrease; falls; $7.5 billion downward; fall; increase; rises; $40 billion downward; rise;...
decrease in personal taxes from $100 billion to 580 billion will increase real GDP 11. If...

decrease in personal taxes from $100 billion to 580 billion will increase real GDP 11. If the MPC -0.75, a decrease in person by A) $20 billion. B) $40 billion. C) $60 billion. D) $80 billion. Table 10.1 Consumption C - $1.0+ 0.80YD Investment $1.5 Government purchases $2.2 Net exports Taxes Government transfer payments $0 (all values are in billions of dollars) 2, 12. Refer to Table 10.1. Equilibrium real GDP for this economy is equal to A) $5.75 billion....
suppose the actual GDP is $15 trillion & the potential real GDP is $18 trillion. If...

suppose the actual GDP is $15 trillion & the potential real GDP is $18 trillion. If the MPS is .03 What kind of GDP is this economy experiencing? what kind fiscal policy & monetary policy would u recommend to eliminate the gap (include a graph to illustrate the relationship) By how much the government should change taxes to eliminate the gap?

Assume that Equilibrium GDP is $4,000 billion. Potential GDP is $5,000 billion. The marginal propensity to...

Assume that Equilibrium GDP is $4,000 billion. Potential GDP is $5,000 billion. The marginal propensity to consume is 4/5 (0.8). By how much and in what direction should government purchases be changed? Group of answer choices increase by $200 billion increase by $1,000 billion decrease by $1,000 billion increase by $100 billion

Assume that equilibrium real GDP is $800 billion. Potential real GDP is 950 billion, the MPC...

Homework Answers

Add Answer to:
Assume that equilibrium real GDP is $800 billion. Potential real GDP is 950 billion, the MPC...

Post as a guest

Earn Coins