# Answer to Question #59905 in Macroeconomics for Ryan

Question #59905

Suppose that the economy is in recession with a recessionary gap of $1 trillion. The MPC is 0.9 and the tax rate on income is 30%. Answer the following

(a) Compute the value of the multiplier.

(b) Suppose the AS curve is completely flat. What would be the change in G needed to make the gap equal to zero?

(c) Would the change in G you found in b. be enough if the AS curve was positively sloped? Explain using the appropriate graph.

(a) Compute the value of the multiplier.

(b) Suppose the AS curve is completely flat. What would be the change in G needed to make the gap equal to zero?

(c) Would the change in G you found in b. be enough if the AS curve was positively sloped? Explain using the appropriate graph.

Expert's answer

Recessionary gap of $1 trillion, c = 0.9, t = 0.3.

(a) The value of the multiplier is m = 1/(1 - c*(1 - t)) = 1/(1 - 0.9*(1 - 0.3)) = 1/0.37 = 2.7.

(b) If the AS curve is completely flat, then the change in G needed to make the gap equal to zero is changeY/changeG = m, so:

1/changeG = 2.7, change in G = 1/2.7 = $0.37 trillion.

(c) If the AS curve was positively sloped, then this change may be lower than it is needed.

(a) The value of the multiplier is m = 1/(1 - c*(1 - t)) = 1/(1 - 0.9*(1 - 0.3)) = 1/0.37 = 2.7.

(b) If the AS curve is completely flat, then the change in G needed to make the gap equal to zero is changeY/changeG = m, so:

1/changeG = 2.7, change in G = 1/2.7 = $0.37 trillion.

(c) If the AS curve was positively sloped, then this change may be lower than it is needed.

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