Suppose real GDP is $13 trillion,potential real GDP is $13.5 trillion,and Congress and the president plan to use fiscal policy to restore the economy to potential real GDP.Assuming a constant price level,Congress and the president would need to increase government purchases by
A)$500 billion.
B)less than $500 billion.
C)more than $500 billion.
D)None of the above are correct.Congress must act to decrease government purchases in this case.

Question

Quizplus · Accepted Answer

Since real GDP is below potential real GDP, expansionary fiscal policy is necessary to restore the economy to potential. The formula for calculating the necessary increase in government purchases is (potential real GDP - current real GDP) x (multiplier). Using the given values, we get:
(13.5 - 13) x (multiplier) = 0.5 x (multiplier)
The exact value of the multiplier is unknown, but it is generally accepted to be between 0.5 and 2. Therefore, we can estimate that the necessary increase in government purchases would be less than $500 billion.

Suppose Real GDP Is $13 Trillion,potential Real GDP Is $13