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) $80 billion.
B) $140 billion.
C) $200 billion.
D) $400 billion.

Question

Quizplus · Accepted Answer

The recessionary gap is the difference between full-employment real GDP and current equilibrium real GDP, which is $400 billion ($1,200 billion - $800 billion). To close this gap, we need to increase aggregate expenditures by $200 billion, which is calculated as follows: 
Multiplier = 1 / (1 - MPC) = 1 / (1 - 0.50) = 2 
Change in Aggregate Expenditures = Multiplier x Change in Real GDP 
$400 billion = 2 x Change in Aggregate Expenditures 
Change in Aggregate Expenditures = $200 billion

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