Question

Suppose real GDP is $13 trillion, potential real GDP is $13.5 trillion, and Congress and the President plan to use fiscal policy to restore the economy to potential real GDP. Assuming a constant price level, Congress and the President would need to increase government purchases by

Answer 1

Answer:

Congress and the President would need to increase government purchases by $500 billion.

Explanation:

Real GDP refers to the measure of a country's total economic output, which is adjusted for price changes.  It makes the comparison of GDP from year to year and from different years to be more meaningful because it shows the comparisons for both the quantity and value of goods and services.

Potential real GDP refers to the level of output that an economy can produce at a constant inflation rate.

In the scenario given above, in order to find how much the congress and president would need to increase spending by, we subtract the real GDP from the potential real GDP, thus:

$13.5 trillion - $13 trillion = $500 billion.