If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 10, and potential output (Y*)equals 9,000, then government purchases must ________ to eliminate any output gap.
A)increase by 100
B)decrease by 100
C)increase by 1,000
D)decrease by 1,000

Question

Quizplus · Accepted Answer

If the multiplier is 10, a 100-unit decrease in government purchases results in a 1,000-unit decrease in output. This closes the expansionary output gap of 1,000.

If Short-Run Equilibrium Output Equals 10,000, the Income-Expenditure Multiplier Equals