The equilibrium level of real GDP is $5,000 billion, the full employment level of real GDP is $6,000, and the marginal propensity to consume (MPC)is 0.90. Which of the following statements is true ?
A)A recessionary gap exists equal to $100 billion.
B)The full employment target could be reached if government increased its spending by $100 billion.
C)Both of the above statements are true.
D)Neither of the above statements are true.

Question

Quizplus · Accepted Answer

The recessionary gap is the difference between the equilibrium level of real GDP and the full employment level of real GDP. In this case, the recessionary gap is $6,000 billion - $5,000 billion = $100 billion.The full employment target could be reached if government increased its spending by $100 billion. This is because an increase in government spending will increase aggregate demand, which will lead to an increase in real GDP. The increase in real GDP will continue until the full employment level of real GDP is reached.

The Equilibrium Level of Real GDP Is $5,000 Billion, the Full