If the income-expenditure multiplier equals 2.5 and a 1 percent increase in the real interest rate reduces autonomous spending by 200 units, then a 1,000 unit expansionary gap can be eliminated by ________ the real interest rate by ________ percent.

Question

Quizplus · Accepted Answer

To eliminate a 1,000 unit expansionary gap when the income-expenditure multiplier is 2.5, a reduction in autonomous spending of 400 units is needed. If each percent rise in real interest rates decreases autonomous spending by 200 units, then a 2 percent increase is needed.

If the Income-Expenditure Multiplier Equals 2