If the MPS is .25 and the economy has a recessionary expenditure gap of $5 billion,then equilibrium GDP is:
A) $5 billion below the full-employment GDP.
B) $5 billion above the full-employment GDP.
C) $20 billion below the full-employment GDP.
D) $20 billion above the full-employment GDP.

Question

Quizplus · Accepted Answer

The formula to calculate the equilibrium GDP in a recessionary expenditure gap is:
Equilibrium GDP = Full-employment GDP - (MPS x Recessionary Expenditure Gap)
Using the given values, we can calculate the equilibrium GDP as:
Equilibrium GDP = Full-employment GDP - (0.25 x $5 billion)
Equilibrium GDP = Full-employment GDP - $1.25 billion
Since the economy has a recessionary expenditure gap, the equilibrium GDP is below the full-employment GDP. Therefore, the correct answer is (C) $20 billion below the full-employment GDP.

If the MPS Is