Assume the economy in the United States has a break-even point of $4,500 billion. Businesses plan...

Assume the economy in the United States has a break-even point of $4,500 billion. Businesses plan to Invest $78 billion. Government purchases $864 billion worth of goods and services. Exports are $458 billion. Imports are $432 billion and Net Exports is $26 billion. For every one dollar change in disposable income, households spend 75 cents. The labor force in this economy is 154,432,000. The population is 265,752,000. 9,765,000 people are not working but actively seeking work.

By how much should Government increase (or reduce) spending to close the GDP Gap?
EXPLAIN what could happen to make the policy ineffective? (Choose one complication from the Problems, Criticisms, and Complications of Implementing Fiscal Policy)

Solutions

Expert Solution

Answer:

MPC is change in consumption with change in disposable income.

Hence, For every $1, household spends 75 cents.

So MPC = 0.75

Answer: 2

MPS = 1 - MPC

=1-0.75

=0.25

Multiplier = 1/MPS = 1/0.25 = 4

Answer: 3

GDP =C+I+G+ NX

where C consumption = 75* DI (DI = Disposable Income) = 75* 4500

i = investment expenditure = 78

G = Government spending = 864

NX = export import = 26

Equilibrium GDP = $4,343

Asnwer: 4

NRU - Natural Rate of Unemployment

ARU = 3.67% =9,765,000/265,752,000

Potential GDP = (1-NRU) / (1-ARU)*GDP

= (1-5%)/(1-3.67%)*4343

=59.96

Rahul Sunny answered 2 years ago

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