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

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

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