Question

Suppose that real GDP is currently ​$13.6 trillion and potential real GDP is​ $14.0 trillion, or a gap of ​$400 billion. The government purchases multiplierLOADING... is 5.0​, and the tax multiplier is 4.0. Holding other factors​ constant, by how much will government purchases need to be increased to bring the economy to equilibrium at potential​ GDP? Government spending will need to be increased by ​$ nothing billion. ​(Enter your response rounded to the nearest whole​ number.)

Answer 1

$174 billion is the answer.

Step-by-step explanation:

Given data: Current GDP = $13.6 trillion, potential GDP = $14.0 trillion, Loader = 5.0, Tax multiplier = 4.0.

It has been assumed in the question that the other factors are constant

Change in the GDP = government multiplier (Change in G)

`\Delta Y=3.3 \Delta G`

`400 / 3.3=\Delta G`

`\Delta \mathrm{G}=121 \$ \text { billion }` (increase in Government spending)

Now,
`\Delta \mathrm{Y}=\text { tax multiplier }(\Delta \mathrm{T})`

`\Delta \mathrm{T}=400 / 2.3`

=174 $ billion (fall in taxes) (rounded off to the nearest integer figure).