Assume that full-employment real GDP is Y = $1,200 billion, the current equilibrium real GDP is Y...
Question:
Assume that full-employment real GDP is Y = $1,200 billion, the current equilibrium real GDP is Y = $1,600 billion, and the MPC = 0.8. To bring the economy to a full-employment real GDP,
a. a recessionary gap must be bridged by increasing aggregate expenditures by $80 billion.
b. an inflationary gap must be bridged by cutting aggregate expenditures by $80 billion.
c. nothing is needed to bring the economy into full-employment equilibrium.
d. a recessionary gap must be bridged by increasing aggregate expenditures by $400 billion.
e. an inflationary gap must be bridged by cutting aggregate expenditures by $400 billion.
Full-Employment GDP:
The full-employment GDP of a country is the GDP that the country would operate at in an ideal situation. The resources of the economy are optimally used and the unemployment rate is equal to the natural rate of unemployment.
Answer and Explanation: 1
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View this answerThe correct option is b. an inflationary gap must be bridged by cutting aggregate expenditures by $80 billion.
As the equilibrium real GDP is higher...
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The Multiplier Effect and the Simple Spending Multiplier: Definition and Examples
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Chapter 5 / Lesson 9
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Learn about the multiplier effect and the spending/expenditure multiplier, including the marginal propensity to consume and the marginal propensity to save.
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