Question

Suppose that real GDP is currently ​$13.55 trillion and potential real GDP is​ $14.0 trillion, or a gap of ​$500500 billion. The government purchases multiplierLOADING... is 5.05.0​, and the tax multiplier is 4.04.0. Holding other factors​ constant, by how much will government purchases need to be increased to bring the economy to equilibrium at potential​ GDP?

Answer 1

Answer:

$100 billion

Explanation:

Real GDP is currently = ​$13.55 trillion

Potential real GDP =​ $14.0 trillion

Gap = ​$500 billion

Government purchases multiplier = 5.0

Tax multiplier = 4.0

To increase aggregate demand by $500 billion, the required increase in government expenditure is:

= (1 ÷ government purchases multiplier) × change in aggregate demand

= (1 ÷ 5) × $500

= $100 billion

Therefore, the government expenditure need to be increased by $100 billion.