Assume that potential GDP is $200 billion and the multiplier equals 5.The recessionary gap is $10 billion.What is the actual level of equilibrium income?

Question

Quizplus · Accepted Answer

The formula for calculating the equilibrium level of income is: 
Y = GDP = Potential GDP + (Multiplier x Recessionary Gap)
Substituting the given values,
Y = $200 billion + (5 x $10 billion)
Y = $200 billion + $50 billion
Y = $250 billion 
However, the question asks for the actual level of equilibrium income, which is the level of income when the economy is in equilibrium. So, the correct answer is $150 billion ($200 billion - $50 billion). Therefore, option B is correct.

Assume That Potential GDP Is $200 Billion and the Multiplier