Suppose the price level is fixed, the MPC is 0.8, and the GDP gap is a negative $200 billion.To achieve full-employment output (exactly), government should
A)increase government expenditures by $200 billion.
B)reduce taxes by $200 billion.
C)increase government expenditures by $40 billion.
D)reduce taxes by $160 billion.

Question

Quizplus · Accepted Answer

The spending multiplier is 1/(1-MPC) = 1/(1-0.8) = 5. To close a $200 billion GDP gap, government expenditures should increase by $200 billion / 5 = $40 billion.

Suppose the Price Level Is Fixed, the MPC Is 0