Question

Suppose that real GDP is currently

​$13.22

trillion and potential real GDP is​ $14.0 trillion, or a gap of

​$800800

billion. The government purchases multiplier

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is

3.33.3​,

and the tax multiplier is

2.32.3.

Holding other factors​ constant, by how much will government purchases need to be increased to bring the economy to equilibrium at potential​ GDP?

Government spending will need to be increased by ------ billion. ​(Enter your response rounded to the nearest whole​number.)

Answer 1

Here Government purchase multiplier = 3.3 which means that $1 increase in government spending will increase real GDP by $3.3.

Here Potential GDP = 14 trillion and Current Real GDP = 13.2 trillion

Hence, Potential GDP - Current Real GDP = 0.8 trillion or 800 billion(This is what we called GDP Gap)

Hence, In order to bring the economy to equilibrium at potential​ GDP We have to increase GDP by $800 billion.

As discussed above that here $1 increase in government spending will increase real GDP by $3.3.

So, In order to increase GDP by 800 billion Government spending should increase by $800 billion/3.3

= $242,424,242,424

Government spending will need to be increased by 243 billion