Question

If the MPC = .80, all taxes are lump-sum taxes, and the equilibrium GDP is $40 billion below the full-employment GDP, the size of the recessionary gap is _________________.
a) $40 billion
b) $20 billion
c) $8 billion
d) cannot be determined from the information given

Answer 1

Answer:

recessionary gap = 8 billion

so correct option is c) $8 billion

Explanation:

given data

MPC = 0.80

GDP = $40 billion

to find out

the size of the recessionary gap

solution

we get here first Multiplier  that is

Multiplier  = $\frac{1}{1-MPC}$     ..................1

Multiplier  = $\frac{1}{1-0.80}$

Multiplier  = 5

so recessionary gap will be

recessionary gap = $\frac{GDP}{5}$     ................2

recessionary gap = $\frac{40}{5}$

recessionary gap = 8 billion

so correct option is c) $8 billion