If the MPS is 0.25 and the economy has a recessionary expenditure gap of $5 billion, then equilibrium GDP is
A)$5 billion below the full-employment GDP.
B)$5 billion above the full-employment GDP.
C)$20 billion below the full-employment GDP.
D)$20 billion above the full-employment GDP.

Question

Quizplus · Accepted Answer

The multiplier is 1/MPS, which is 1/0.25 = 4. The recessionary gap of $5 billion, multiplied by the multiplier of 4, results in a $20 billion gap in GDP. Thus, equilibrium GDP is $20 billion below full-employment GDP.

If the MPS Is 0