Question

Assume that the marginal propensity to consume in an economy is 0.9. If the economy's full-employment real GDP is $500 billion and its equilibrium real GDP is $550 billion, there is an inflationary expenditure gap of

Answer 1

Answer:

$50 billion

Explanation:

Full employment Real GDP = $500 billion

Equilibrium Real GDP = $550 billion

Inflationary expenditure gap = Equilibrium Real GDP - Full employment Real GDP

Inflationary expenditure gap = $550 billion - $500 billion

Inflationary expenditure gap = $50 billion.

Hence, there is an inflationary expenditure gap of $50 billion

Inflationary expenditure gap is the amount by which the Equilibrium Real GDP exceeds the Full employment Real GDP.