Assume that full-employment real GDP is Y = $1,200 billion, the current equilibrium real GDP is Y = $800 billion, and the MPC is 0.50. What level of aggregate expenditures will close the recessionary gap?
A)$50 billion.
B)$80 billion.
C)$140 billion.
D)$200 billion.
E)$400 billion.

Question

Quizplus · Accepted Answer

The recessionary gap is $400 billion ($1,200 billion - $800 billion). With an MPC of 0.50, the multiplier is 2 (1/(1-MPC)). Therefore, to close the gap, aggregate expenditures need to increase by $200 billion ($400 billion / 2).

Assume That Full-Employment Real GDP Is Y = $1,200 Billion