Ceteris paribus, people save 25% of additional dollars. How much would the government have to spend...

Ceteris paribus, people save 25% of additional dollars. How much would the government have to spend to close a $400 GDP gap? Explain

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Expert Solution

This means the Marginal propensity to Save (MPS) = 0.25

So, spending multiplier = 1/MPS = 1/0.25 = 4

This means, the government needs to spend $1, to close a GDP gap of $4.

So, to close the GDP gap of $400, the government needs to spends = $400/4 = $100

So, the government needs to spend $100.

Rahul Sunny answered 1 year ago

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