Question

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 how much will taxes have to be cut to bring the economy to equilibrium at potential GDP?

Taxes will need to be cut by $___ billion. (Enter your response rounded to the nearest whole number.)

Answer 1

a) As the gap in the economy is of 1000 billion and the government purchase multiplier is 3.3 then to fill the gap of 1000 billion the government need to increase the spending by 1000 / 3.3 = 303.03 billion only.

If we consider gap to the 1012 then its 306.66

b) As the tax multiplier in the economy is only 2.3 and the gap is 1000 then they need to cut taxes by 434.78 billion.