Answer:
Note: the <u>e</u> question is incomplete. The missing part is "<em>you recommended in Question 4 ineffective</em>?"
1. When the GDP has decreased, but the unemployment has increased, there is slowdown in the economy. Therefore, this slowdown combined with the stable inflation points that the economy is in recession.
2. GDP gap = Actual GDP - Potential GDP
GDP gap = $18,500 billion - $19,350 billion
GDP gap = -$850 billion
GDP gap is the difference between the actual and potential GDP.
3. Calculation of the government expenditure multiplier and tax multiplier
Government spending multiplier = 1 / (1-MPC)
Government spending multiplier = 1/(1-0.75)
Government spending multiplier = 1/0.25
Government spending multiplier = 4
Tax Multiplier = -MPC / (1-MPC)
Tax Multiplier = -0.75 / (1-0.75)
Tax Multiplier = -0.75 / 0.25
Tax Multiplier = -3
Calculation of the required increase in government spending
ΔG = ΔY/Government spending multiplier
ΔG = $850 billion / 4
ΔG = $212.5 billion
Calculation of the required cut in taxes
ΔY = Tax multiplier * ΔT
ΔT = ΔY / Government spending multiplier
ΔT = $850 billion / -3
ΔT = -$283.33 billion
Therefore, the government spending should increase by $212.5 billion and taxes should cut by $283.33 billion.
4. The government should opt for increasing government spending, this is because the government spending multiplier is greater than the tax multiplier.
5. If there is not direct impact on inflation after the increase in government spending
