If the MPC is.50, all taxes are lump-sum taxes, and the equilibrium GDP is $40 billion below the full-employment GDP, then the size of the recessionary expenditure gap:
A)is $40 billion.
B)is $20 billion.
C)is $60 billion.
D)cannot be determined from the information given.

Question

Quizplus · Accepted Answer

The recessionary expenditure gap is calculated by dividing the GDP gap by the multiplier. With an MPC of 0.50, the multiplier is 2 (1/(1-MPC)). Therefore, the expenditure gap is $40 billion / 2 = $20 billion.

If the MPC Is