Question

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion; (2) investment = $50 billion; (3) government purchases = $100 billion; and (4) net exports = +$20 billion. If the full-employment level of GDP for this economy is $620 billion, then what combination of actions would be most consistent with closing the GDP-gap here?

Answer 1

To close this gap, contractionary policies should be adopted.

Explanation:

The consumption expenditure is given at $500 billion.

The investment expenditure is $50 billion.

The government purchases will be $100 billion.

And, net exports are $20 billion.

GDP

=C+I+G+NX

=$(500+50+100+20) billion

=$670 billion

The GDP at this point is greater than the full employment level of GDP.

This shows that there is inflation in the economy.

So, the government needs to adopt the expansionary monetary and fiscal policy. It can decrease spending or increase taxes to close the GDP gap.