Effective fiscal policy to correct for an expansionary gap will

24. Effective fiscal policy to correct for an expansionary gap will

a. only reduce the price level

b. only reduce real GDP

c. only increase the price level

d. only increase real GDP

e. reduce both the price level and real GDP

25. How much would government purchases have to change to increase RGDP $1,000,000,000 if MPC were 0.9?

a. $100,000

b. $100,000,000

c. $10,000,000

d. $1,000,000

e. 1,000,000,000

Solutions

Expert Solution

24. Effective fiscal policy to correct for an expansionary gap will:

e. Reduce both the price level and real GDP
Explanation - An effective fiscal policy to correct an expansionary gap would be a decrease in government spendings, increase in taxation, decrease in transfer payments, etc. Government uses contractionary fiscal policies to correct the gap . This policy will reduce the aggregate demand in the economy and the decrease in demand will in turn reduce the price level. Thus, an effective fiscal policy to correct an expansionary gap will reduce both the price level and real GDP.

25. How much would government purchases have to change to increase RGDP $1,000,000,000 if MPC were 0.9?

b. $100,000,000
Explanation - The MPC of 0.9 will yield a savings of 10% of the given income ($1,000,000,00).
Therefore, the change in government purchases would be 10% of 1,000,000,000 which is $100,000,000.

Rahul Sunny answered 1 year ago

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