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If the income-expenditure multiplier equals 4 and a 1 percentage point increase in the real interest...

If the income-expenditure multiplier equals 4 and a 1 percentage point increase in the real interest rate reduces autonomous spending by 100 units, then a 1,000 unit recessionary gap can be eliminated by _____ the real interest rate by _____ percentage points.

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Answer #1

If the income-expenditure multiplier equals 4 and a 1 percentage point increase in the real interest rate reduces autonomous spending by 100 units, then a 1,000 unit recessionary gap can be eliminated by decreasing the real interest rate by 2.5 percentage points.

The Recessionary Gap=1000

Income expenditure Multiplier = 4

Required decrease in the autonomous spending = 1000/4 = 250 units

1% increase will cause the spending to decrease by 100 units

So, to reduce 250 units, interest should be changed by 250/100 = 2.5%

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