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andre [41]
3 years ago
15

Suppose the economy is operating at an output of $4,000 billion. Assume furthermore that potential output is $5,000 billion and

the marginal propensity to consume is 0.75. _____ would close this recessionary gap.
Business
1 answer:
motikmotik3 years ago
7 0

Answer:

The correct answer is $250 billion.

Explanation:

An economy is operating at an output level of $4,000 billion.  

The potential output level is $5,000 billion.  

The marginal propensity to consume is 0.75.  

The recessionary gap is

= $5,000 billion - $4,000 billion

= $1,000 billion

ΔY = \frac{1}{1-MPC}\times \Delta G

$1,000 = \frac{1}{1-0.75}\times \Delta G

$1,000 = \frac{1}{0.25}\times \Delta G

$1,000 = 4 \times \Delta G

ΔG = \frac{1,000}{4}

The change in income required to correct this recessionary gap is $250 billion.

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