Answer to Question #82920 in Macroeconomics for bridgette w bussey

Question

Suppose an economy is in recession with a negative GDP gap of $800 billion. If MPC is 0.9, how much should the government spend to eliminate the negative GDP gap?

Answer 1

m = 1/(1-МРС)=1/(1-0.9)=10

ΔDG =ΔGDP/m=800/10=$80 billion.

Answer: the government should spend $80 billion to eliminate the negative GDP gap.