For each of a-d, write your numerical response or choose the correct option amon

Question

For each of a-d, write your numerical response or choose the correct option among the choices in parentheses to fill in the blanks. For e, answer the question in a sentence or two. Put your response in your own words. Do not copy from or paraphrase the text or other sources. (10 points) For a-d, assume an economy with an MPC of 0.75 has actual output of $1,800 billion and potential output of $2,100 billion. (2 points each) a. The spending multiplier is ______ . b. The GDP gap is $______ billion. This is a(n) (recessionary / inflationary) ________ gap. c. A(n) (increase / decrease) ________ in government spending of $______ billion would eliminate this gap. d. Alternatively, a(n) increase / decrease ________ in taxes of $______ billion would eliminate this gap. e. In your own words, give and explain one of the two main false concerns about the burden of the federal government debt.

Explanation / Answer

a) The multiplier will be K = 1/1-MPC

= 1/1-0.75 = 1/0.25 = 4

The spending multiplier is 4.

b) The gap is 300 billion.

c) it is a recessionary gap.

d) an increase in the government spending of (300 /4) 75 billion will fill the gap.

e) or a decrease in the tax of $75 billion would eliminate the gap.

ONe of the two main false concerns about the burden of federal government debt is that as long as the debt is held by the local public it will not be harmful to the government. which is false. Even if the debt is held internally i.e. by the local public it is harmful to the local government in the same manner. They will have to pay higher interest rates or it will depreciate the value of the currency of they print the money to pay the debt or it will increase the taxes.  

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