Actual output is equal to 6,000 and potential output is 8,000. the multiplier is currently equal...

Actual output is equal to 6,000 and potential output is 8,000. the multiplier is currently equal to 5. Using this data government purchases will need to ___ in order to eliminate the output gap.

A) increase by 4000

B) decrease by 200

C) increase by 400

D) decreases by 2,000

Solutions

Expert Solution

The correct answer is (C) increase by 400

Current Actual Output = 6000 and Potential Output = 8000 => Potential output > Actual Output. Hence There is a deflationary gap and hence Government purchase should increase in order for actual output to become equal to Potential output and to close the recessionary gap.

Multiplier = 5, Means increase in government purchase by 1 unit will increase the equilibrium output by 5 units.

Here, we want equilibrium output to increase by Potential Output - Actual Output = 8000 - 6000 = 2000 units.

Let additional Government purchase required be G and hence we have to calculate G

1 additional unit of Government purchase will increase actual output by 5 units. So, G units of Additional government will increase output by 5G units and this 5G must equals 2000

=> 5G = 2000

=> G = 400.

Hence government purchase should increase by 400 units

Hence, the correct answer is (C) increase by 400

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Why might actual output exceed potential output (an expansionary gap)? Why might actual output be lower...

Why might actual output exceed potential output (an expansionary gap)? Why might actual output be lower than potential output (a recessionary gap)?

The recession has meant that the actual output of the Australian economy is below the potential...

The recession has meant that the actual output of the Australian economy is below the potential output. The government has already introduced policy measures as you have identified above to boost aggregate demand (AD) and cover the output gap. However, from lecture 7 (Chapter 15) we can conclude that the road to economic recovery in Australia and mitigating the current output gap also requires policies to shift the short-run aggregate supply (SRAS) to the right. Discuss two of the distinct...

Why is it useful to analyze " Short-run output" graph and "potential and actual real gdp...

Why is it useful to analyze " Short-run output" graph and "potential and actual real gdp graph". What economic challenges does each graph depict and what economic successes does each graph depict? (for USA specifically)

If the mpc in the economy is equal to 4/5, then the expenditure multiplier is equal...

If the mpc in the economy is equal to 4/5, then the expenditure multiplier is equal to

Assume that the MPS in an economy is equal to 0.10. The multiplier must be equal...

Assume that the MPS in an economy is equal to 0.10. The multiplier must be equal to 10.00. 1.You have established that the multiplier is 10.00. Now assume that autonomous real consumption is $3 trillion. There is no other autonomous spending presently taking place in the economy. At what level is consumption equal to real GDP? $____trillion. (Round your answer to two decimal places) 2. You have established that the multiplier is 10.00 and that autonomous real consumption is $3...

Assume that the MPS in an economy is equal to 0.20 The multiplier must be equal...

Assume that the MPS in an economy is equal to 0.20 The multiplier must be equal to 5.00. You have established that the multiplier is 5.00. Now assume that autonomous real consumption is $3 trillion. There is no other autonomous spending presently taking place in the economy. At what level is consumption equal to real GDP? You have established that the multiplier is 5.00 and that autonomous real consumption is $3 trillion. There is an autonomous investment of $22 trillion...

What is difference between actual GDP & potential GDP? If actual GDP > Potential GDP are...

What is difference between actual GDP & potential GDP? If actual GDP > Potential GDP are we in boom (expansion) or bust (recession)? If actual GDP > potential GDP is unemployment higher than NAROU or lower? What is the danger of actual GDP > potential GDP? The economy can avoid this danger if what happens?

Suppose the economy is currently in short run macroeconomic equilibrium, with actual GDP smaller than potential...

Suppose the economy is currently in short run macroeconomic equilibrium, with actual GDP smaller than potential GDP. (a) Depict this situation using AD-AS, being sure to label all curves and axes. (b) Give an example of an automatic stabilizer, and explain how it could close the gap this economy has. (c) What open market operation could the Federal Reserve carry out, to close this gap? Show graphically the effect it would have.

"You purchase a machine. It costs $47,000 to purchase, $8,000 to install, and $6,000 for its...

"You purchase a machine. It costs $47,000 to purchase, $8,000 to install, and $6,000 for its freight with a 7-year life. Use the DDB method (multiplier 2) switching to straight line depreciation if appropriate. Salvage value is $13,000. Determine the book value at the end of year 3."

- Fixed assets costing $8,000 with a book value of $3,000 were sold for $6,000. -...

- Fixed assets costing $8,000 with a book value of $3,000 were sold for $6,000. - Long term investments costing $5,000 were sold for $5,000. -Redeemed $5,000 of the bond issuance. - Sold stock___________. -Paid dividends_________. All other transactions involved cash. Be certain you have accounted for all the changes in the account line items somewhere in your 3 areas of SCF (ex. Fixed Assets account went from $28K to $40k - we did not just buy $12K this year....)...

Subjects