If the economy has a recessionary expenditure gap of $15 billion and the MPS is 0.3, then the equilibrium level of GDP is
A)$16 billion below the full-employment level.
B)$21 billion below the full-employment level.
C)$50 billion below the full-employment level.
D)$50 billion above the full-employment level.

Question

Quizplus · Accepted Answer

The expenditure multiplier is 1/MPS, which is 1/0.3 = 3.33. The recessionary gap of $15 billion multiplied by the multiplier (3.33) results in a $50 billion shortfall in GDP below the full-employment level.

If the Economy Has a Recessionary Expenditure Gap of $15