Asked by Laura Arrunada on May 11, 2024
Verified
If full employment GDP is $1 trillion greater than equilibrium GDP,and there is a recessionary gap of $400 billion,the multiplier is
A) 1.
B) 2.5.
C) 4.
D) 5.
E) This is impossible to find with the information given.
Recessionary Gap
The situation where an economy's real GDP is lower than its potential GDP, indicating underutilized resources and unemployment.
Equilibrium GDP
The level of Gross Domestic Product where aggregate supply equals aggregate demand, and the economy is in a state of balance.
Multiplier
The factor by which a change in investment, government spending, or other forms of economic activity is magnified in the overall economy.
- Gain an understanding of the multiplier effect and its consequences for fiscal policy formulation.
Verified Answer
JB
Janae BrownMay 12, 2024
Final Answer :
B
Explanation :
The multiplier is calculated as the ratio of the change in GDP to the change in autonomous spending. Here, the recessionary gap of $400 billion needs to be closed to reach full employment GDP, which is $1 trillion greater than the current equilibrium. The formula for the multiplier is Change in GDP / Change in spending. Therefore, $1 trillion / $400 billion = 2.5.
Learning Objectives
- Gain an understanding of the multiplier effect and its consequences for fiscal policy formulation.