Ask Question
1 December, 20:16

In the following case, either a recessionary or inflationary gap exists. Assume that the aggregate supply curve is horizontal, so that the change in real GDP arising from a shift of the aggregate demand curve equals the size of the shift of the curve. Calculate the magnitude of both the change in government purchases of goods and services and the change in government transfers necessary to close the gap. a. Real GDP equals $100 billion, potential output equals $160 billion, and the marginal propensity to consume is 0.75.

+3
Answers (1)
  1. 1 December, 22:08
    0
    This is a recessionary gap of $60 billion.

    Simple multiplier = 1 / (1-.75) = 1/.25 = 4

    The government would then have to increase its spending on goods and merchandise by total gap divided my simple multiplier.

    $60 billion / 4 = $15 billionTransfer multiplier - Each dollar of a Transfer payment will increase real GDP by Transfer Payment Multiplier

    = MPC / (1-MPC) = 0.75 / (1-0.75) = 0.75/0.25 = $3

    The government must increase spending on transfer payments by total gap divided by transfer payment multiplier = $60 billion / $3 = $20 billion
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “In the following case, either a recessionary or inflationary gap exists. Assume that the aggregate supply curve is horizontal, so that the ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers