Answer to Question #60382 in Macroeconomics for Alex

Question

Suppose equilibrium savings equals $750 billion, and equilibrium GDP equals $3,500 billion. Investment spending rises to $900 billion, and equilibrium level of real GDP increases by $500 billion. Assuming everything else remains constant, the value of the spending multiplier is:
A. 2.5
B. 1.8
C. 4.4
D. 4.0
E. 3.3

Suppose the current rate of inflation is about 14% and there is an inflationary gap of $150 billion in the economy. Which of the following policies would be most appropriate to reduce inflation if the marginal propensity to save is equal to 0.05
A. Reduce government spending by $30 billion
B. Reduce government spending by $25 billion
C. Reduce G by $7.5 billion
D. Reduce G by $150 billion
E. Reduce G by $50 billion

Answer 1

Answer: E. 3.3.

Answer: C. Reduce G by $7.5 billion.