If the government purchases multiplier is equal to 2, and real GDP is 10 Trillion with...

If the government purchases multiplier is equal to 2, and real GDP is 10 Trillion with the potential GDP equal to $12 Trillion, the government would need to increase purchases by ______________ to close the __________gap.

1 T: inflationary

2T: recessionary

1 T: Recessionary

2T: Inflationary

In the short run, Aggregate demand in a country will decrease if there is a decrease in the

Tax rate in the country

Money Supply

Price of factors of production

Level of technology

Solutions

Expert Solution

(1)

The correct answer is (c) 1T : recessionary

Current Real GDP = 10 trillion and Potential GDP = 12 trillion. Hence, Potential GDP > Current GDP => There is Recessionary Gap. Hence In order to close the Gap Real GDP should increase by 2 trillion i.e.

Government purchase multiplier(Mg) = 2

Formula:

Hence Government purchase should increase by 1T in order to close deflationary Gap.

Hence, the correct answer is (c) 1T : recessionary

(2)

The correct answer is (b) Money Supply

Decrease in tax rate results in increase in disposable income and hence increase in consumption and hence AD will shift to the right . So, option (a) is incorrect.

Level of Technology and price of factor of production affects Aggregate supply and not Aggregate demand. Hence option (c) and (d) are incorrect.

Decrease in Money supply will shift to the left and hence at current price there will be more output and hence AD will decrease and shift to the left.

Hence the correct answer is (b) Money Supply

Rahul Sunny answered 1 year ago

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