If the government purchases multiplier equals 2, and real GDP is $14 trillion with potential GDP $14.5 trillion, then government purchases would need to increase by ________ to restore the economy to potential GDP.
A)$7.25 trillion
B)$1 trillion
C)$500 billion
D)$250 billion

Question

Quizplus · Accepted Answer

The gap between real GDP and potential GDP is $0.5 trillion ($14.5 trillion - $14 trillion). With a government purchases multiplier of 2, the government needs to increase purchases by $0.25 trillion (or $250 billion) to close this gap and restore the economy to potential GDP.

If the Government Purchases Multiplier Equals 2, and Real GDP