Question

In: Economics

If the MPC = 0.9, MPI = 0.1 and if investment spending increases by $200, the...

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?

Solutions

Expert Solution

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


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