If the MPC is .50 and the equilibrium GDP is $40 billion below the full-employment GDP,then the size of the recessionary expenditure gap is:
A) $40 billion.
B) $20 billion.
C) $60 billion.
D) $80 billion.

Question

Quizplus · Accepted Answer

The recessionary expenditure gap is the amount by which aggregate expenditures need to increase to achieve full-employment GDP. With an MPC of 0.50, the multiplier is 1/(1-MPC) = 2. Therefore, to close a $40 billion GDP gap, expenditures need to increase by $40 billion / 2 = $20 billion.

If the MPC Is