Question

Assume the United States economy has the following:

Answer 1

Answer:

Note: the e question is incomplete. The missing part is "you recommended in Question 4 ineffective?"

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