Question

to close an inflationary expenditure gap of $20 billion in an economy with a marginal propensity to consume of 0.8, it would be necessary to: select one: a. decrease the aggregate expenditures schedule by $20 billion b. increase the aggregate expenditures schedule by $20 billion c. increase the aggregate expenditures schedule by $4 billion d. decrease the aggregate expenditures schedule by $4 billion

Answer 1

To close an inflationary expenditure gap of $20 billion in an economy with a marginal propensity to consume of 0.8, it would be necessary to decrease the aggregate expenditures schedule by $20 billion.

Step-by-step explanation:

To close an inflationary expenditure gap of $20 billion in an economy with a marginal propensity to consume of 0.8, it would be necessary to decrease the aggregate expenditures schedule by $20 billion (option a).

In an inflationary gap, where aggregate expenditure is greater than potential GDP, the goal is to reduce aggregate expenditure to the level of potential GDP to eliminate inflationary pressures. In this case, a decrease in aggregate expenditure of $20 billion would be needed to close the gap.

The formula to calculate the change in aggregate expenditure is: Change in aggregate expenditure = Marginal Propensity to Consume x Change in disposable income. In this case, the change in aggregate expenditure would be: 0.8 x $20 billion = $16 billion. However, since the question specifies a $20 billion gap, the correct answer is to decrease the aggregate expenditures schedule by $20 billion.