If the gap between the actual level of output and the "natural real GDP" is 1000 and the marginal leakage rate is 0.5 then the simple Keynesian model suggests that the government could close the gap by
A)increasing autonomous expenditures by 1000.
B)increasing autonomous expenditures by 250.
C)increasing autonomous expenditures by 500.
D)decreasing taxes by 500.

Question

Quizplus · Accepted Answer

According to the simple Keynesian model, the government can close the output gap by increasing autonomous expenditures. The formula for output gap is:

Output Gap = Natural Real GDP - Actual Level of Output

In this case, the output gap is 1000.

The formula for the multiplier is:

Multiplier = 1 / Marginal Leakage Rate

In this case, the marginal leakage rate is 0.5.

So, the multiplier is:

Multiplier = 1 / 0.5 = 2

To close the output gap of 1000, the government would need to increase autonomous expenditures by:

Increase in Autonomous Expenditures = Output Gap / Multiplier

Increase in Autonomous Expenditures = 1000 / 2

Increase in Autonomous Expenditures = 500

Therefore, the correct answer is C, increasing autonomous expenditures by 500. Option A and B are not feasible since they do not take into account the multiplier effect. Option D is incorrect since decreasing taxes does not directly increase autonomous expenditures.

If the Gap Between the Actual Level of Output and the "Natural