If the MPC is 0.50 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 calculated by multiplying the GDP gap by the marginal propensity to consume (MPC) multiplier. The multiplier is 1/(1-MPC), which in this case is 2. Therefore, the expenditure gap is $40 billion / 2 = $20 billion.

If the MPC Is 0