In: Economics
If the MPC = 0.9, MPI = 0.1 and if investment spending increases by $200, the level of income or real GDP will be _____.
Assume that potential real GDP is $300 and equilibrium real GDP is 150 the spending multiplier equals 5. What is the recessionary gap?
1)
MPI = I/Y = 0.1
I/Y = 0.1
I = 200
200/Y = 0.1
0.1Y = 200
Y = 2000
real GDP will go up by 2000
2) Potential real GDP = 300
Equilibrium real GDP = 150
recessionary gap = Potential real GDP - Equilibrium real GDP
= 300 - 150 = 150
Spending multiplier = Y/G = 5
Y/G = 5
Y = 150
150 /G = 5
150 = 5G
G = 30
Thus government spending should be increased by $30 to eliminate recessionary gap