Question

Consider the following statement: ''Real GDP is currently $17.7 trillion, and potential real GDP is $17.4 trillion. If Congress and the president would decrease government purchases by $300 billion or increase taxes by $300 billion the economy could be brought t equilibrium at potential GDP.'' If government purchases were to decrease by $300 billion or if taxes were increased by $300 billion, the equilibrium level of real GDP would decrease by:________
A. exactly $300 billion.
B. less than $300 billion.
C. more than $300 billion.
D. None of the above

Answer 1

Answer:

C. more than $300 billion.

Explanation:

As it is given that

Decrease in government purchase by $300 billion

Tax increased by $300 billion

Based on this we can interpret that if there is a more decrease in gross domestic product which leads to the decrease in government expenditure or the government tax is increased is because of multiplier effect as it shows the positive relationship between the spending and the final income

Therefore, the third option is correct

Hence, the above statement is false