Question

An economy has an aggregate demand shortfall of $1200 billion and a GDP gap of $900 billion. The mpc is 2/3. The appropriate fiscal policy to eliminate the gap, using G alone, would be to

Answer 1

Change in government expenditure needed = 300

Step-by-step explanation:

Multiplier 'k' = Change in Income / Change in Govt. expenditure = dY / d GE = 1 / ( 1-MPC )

Desired change in Y, ie GDP = 900 billion , MPC = 2 / 3.

k = 1 / ( 1 - 2/3 ) = 1 / ( 1/3 ) = 3

3 = 900 / d GE

d GE = 900 / 3 = 300

Change in government expenditure = 300