Final answer:
a. Yes, there is cyclical unemployment. b. The minimum decrease in taxes needed is $1,600. c. The minimum increase in government spending needed is $1,600. d. Yes, the answers to b and c are numerically identical. e. An equal increase in government spending and taxes of $1,600 can be used to reach full employment GDP.
Step-by-step explanation:
a. Cyclical unemployment occurs when the actual level of unemployment is higher than the natural rate of unemployment due to a downturn in the business cycle. In this case, if the full-employment level of GDP is $10,000 and the current level of GDP is $8,000, there is a gap of $2,000. This indicates that there is cyclical unemployment because the economy is producing below its potential.
b. To reach full employment, we can use the spending multiplier to determine the minimum decrease in taxes needed. The marginal propensity to consume (MPC) of 0.8 means that for every $1 decrease in taxes, consumer spending will increase by $0.8. Therefore, to close the GDP gap of $2,000, we divide it by the spending multiplier (1/MPC) of 1.25, resulting in a minimum decrease in taxes of $1,600.
c. Similarly, to reach full employment, we can use the spending multiplier to determine the minimum increase in government spending needed. Using the same MPC of 0.8, the spending multiplier is 1/MPC = 1.25. To close the GDP gap of $2,000, we divide it by the spending multiplier of 1.25, resulting in a minimum increase in government spending of $1,600.
d. The answers to questions b and c are numerically identical because the spending multiplier is the reciprocal of the marginal propensity to consume, which remains the same even when the direction of the change (increase or decrease) in taxes or government spending is different.
e. Yes, an equal increase in government spending and taxes can be used to reach full employment GDP. The amount would be the same as the minimum increase in government spending or decrease in taxes, which is $1,600.