Question

During the recent recession sparked by financial crisis, the U.S. economy suffered tremendously. Suppose that, due to the recession U.S. GDP dropped from $14 trillion to $12.5 trillion. This fall in GDP was due to a drop in consumption of $1 trillion and a drop in investment of $500 billion. The U.S. government, under the Obama administration, responded to this recession by increasing government purchases Suppose that government spending had no impact on consumption, investment, or net exports If the Obama administration wanted to bring GDP back up to $14 trillion, government spending would have to rise by ________

Answer 1

Answer:

$1.5 trillion

Explanation:

According to the scenario, computation of the given data are as follow:-

As we know that,

Real GDP = Consumption + Investment + Government Spending + (Export-Import)

US GDP dropped from $14 trillion to $12.5 trillion. The consumption decreased by $1 trillion and investment decreased by $500 billion. So in order to increase the GDP from $12.5 trillion to $14 trillion, the government should have to increase their expenditure by $1.5 trillion.