If the MPC is 0.80, all taxes are lump-sum taxes, and the equilibrium GDP is $25 billion below the full-employment GDP, then the size of the recessionary expenditure gap is:
A) $2 billion
B) $4 billion
C) $5 billion
D) $6 billion

Question

Quizplus · Accepted Answer

The recessionary expenditure gap is calculated by dividing the GDP gap by the multiplier. The multiplier is 1/(1-MPC) = 1/0.2 = 5. Therefore, the gap is $25 billion / 5 = $5 billion.

If the MPC Is 0