If equilibrium GDP is $1 trillion greater than full employment GDP,and there is an inflationary gap of $250 billion,the multiplier is

Question

Quizplus · Accepted Answer

The inflationary gap represents the difference between equilibrium GDP and full employment GDP, which is $250 billion. We are told that equilibrium GDP is $1 trillion greater than full employment GDP, so:

Equilibrium GDP = Full Employment GDP + Inflationary Gap
Equilibrium GDP = Full Employment GDP + $250 billion + $1 trillion
Equilibrium GDP = Full Employment GDP + $1.25 trillion

The multiplier is equal to:

Multiplier = 1 / (1 - MPC)

We are not given the MPC (marginal propensity to consume) in this problem, so we cannot solve for the multiplier directly. However, we do know that the multiplier will be greater than 1 because an increase in aggregate demand (which is necessary to close the inflationary gap) will lead to a larger increase in equilibrium GDP due to the multiplier effect.

Therefore, the only answer choice greater than 1 is D (4), so that is the best choice.

If Equilibrium GDP Is $1 Trillion Greater Than Full Employment