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 spending multiplier is 1/(1-MPC) = 2. To close a $100 billion GDP gap, government expenditures should increase by $50 billion, as $50 billion * 2 = $100 billion.

Suppose the Price Level Is ﬁXed, the MPC Is 0