Suppose the price level is fixed, the MPC is 0.5, and the GDP gap is a negative $100 billion.To achieve full-employment output (exactly), government should
A)increase government expenditures by $100 billion.
B)increase government expenditures by $50 billion.
C)reduce taxes by $50 billion.
D)reduce taxes by $200 billion.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC), which is 2 in this case. To close a $100 billion GDP gap, government expenditures should increase by $50 billion, as the multiplier will amplify this to $100 billion.

Suppose the Price Level Is Fixed, the MPC Is 0