Final answer:
The recessionary expenditure gap is calculated by subtracting the equilibrium real GDP from the full-employment real GDP and then dividing by the spending multiplier. In this case, with a MPC of 0.75 and a spending multiplier of 4, the recessionary gap is $25 billion. The correct answer is option: b. $25 billion
Step-by-step explanation:
Assuming that the marginal propensity to consume (MPC) in an economy is 0.75, and given that the economy's full-employment real GDP is $900 billion, while its equilibrium real GDP is $800 billion, we can determine the recessionary expenditure gap.
First, we calculate the spending multiplier using the formula 1/(1 - MPC), which gives us 1/(1 - 0.75) = 4.
To close the recessionary gap, an initial increase in spending will circulate through the economy multiple times due to the multiplier effect.
The recessionary gap is the shortfall amount from full-employment GDP, in this case, $900 billion - $800 billion = $100 billion.
To find out how much needs to be spent to close this gap, we divide the gap by the spending multiplier, which is $100 billion / 4 = $25 billion.
Therefore, the economy has a recessionary expenditure gap of $25 billion, which is option B. This gap indicates the additional amount of aggregate spending needed to achieve full-employment GDP.