Question

Suppose Kittyville's full-employment GDP = $600 billion, and the current equilibrium GDP = $400 billion. The MPC in this economy = 0. 90. Identify the type of expenditure gap in Kittyville's economy: To correct this gap, Kittyville hires an economist, Kittyzen Keynes, who suggests: government spending or taxes. Decreasing Recessionary Increasing Inflationary Suppose Kittyville decides to change government spending under Keynes' advice. By how much must government spending change to correct for the expenditure gap (rounded to nearest billion dollars)? Suppose Kittyville instead decides to change taxes under Keynes advice. By how much must taxes change to correct for the expenditure gap (rounded to nearest billion dollars)?

Answer 1

The type of expenditure gap that's illustrated in Kittyville's economy is a recessionary expenditure.

What is expenditure gap?

It should be noted that an expenditure gap is when the demand for goods and services is more than the production.

In order to correct the gap, the economy hired the economist who suggested that there should be an increase in government spending and decrease in taxation.

Also, the change in government spending will be:

= Change in income b× (1 - MPC)

= $200 × (1 - 0.9)

= $20 billion.

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