Question

Suppose the economy is operating at an output of $4,000 billion. Assume furthermore that potential output is $5,000 billion and the marginal propensity to consume is 0.75. _____ would close this recessionary gap.

Answer 1

The correct answer is $250 billion.

Step-by-step explanation:

An economy is operating at an output level of $4,000 billion.

The potential output level is $5,000 billion.

The marginal propensity to consume is 0.75.

The recessionary gap is

= $5,000 billion - $4,000 billion

= $1,000 billion

ΔY =
`(1)/(1-MPC)* \Delta G`

$1,000 =
`(1)/(1-0.75)* \Delta G`

$1,000 =
`(1)/(0.25)* \Delta G`

$1,000 =
`4 * \Delta G`

ΔG =
`(1,000)/(4)`

The change in income required to correct this recessionary gap is $250 billion.