In: Economics
How much government spending needs to be increased to maintain full employment in the economy If the economy was facing recessionary gap of $900 billions? Assume MPC is .9. How much tax cut should government give if they wanted to eliminate this recessionary gap through tax cut?
recessionary gap = 900 which mens Y = 900
MPC = 0.9
Y/G = 1/(1 - MPC )
900/G = 1/(1 - 0.9)
900/G = 1/0.1
900/G = 10
900 = 10G
G = 900/10 = 90
Therefore goverenment spending should be increasesd by $ 90 to maintain full employment in the economy
Now Y/T = - MPC/(1 - MPC)
900/T = - 0.9/(1 - 0.9)
900/T = - 0.9/0.1
900/T = - 9
900 = - 9T
T = - 900/9
= - 100
Thus government should give $100 tax cut to eliminate this recessionary gap