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(a)Assuming that investment,net exports,government expenditures,and taxes do not change with changes in real GDP,what are the sizes of the MPC,the MPS,and the multiplier?
(b)If full employment in this economy is 65 million,will there be an inflationary or recessionary gap? What will be the consequence of this gap? By how much would aggregate expenditures in column 3 have to change at each level of GDP to eliminate the inflationary or recessionary gap? Explain.
(c)Will there be an inflationary or recessionary gap if the full-employment level of output is $250 billion? Explain the consequences.By how much would aggregate expenditures in column 3 have to change at each level of GDP to eliminate the inflationary or recessionary gap? Explain.
(a)MPC = .8 ($20/$25);MPS = .2 (1 - .8);multiplier = 5 (1/.2).
(b)A recessionary gap exists.Equilibrium GDP is $300 billion,while full employment GDP is $350 billion.Employment will be 10 million less than at full employment.Aggregate expenditures would have to increase by $10 billion ($350 - $340)at each level of GDP to eliminate the recessionary gap.
(c)An inflationary gap exists.Aggregate expenditures will be excessive,causing demand-pull inflation.Aggregate expenditures would have to fall by $10 billion ($260 - $250)at each level of GDP to eliminate the inflationary gap.

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