Suppose Real GDP Is $13 Trillion,potential Real GDP Is $13

question 304

Multiple Choice

Suppose real GDP is $13 trillion,potential real GDP is $13.5 trillion,and Congress and the president plan to use fiscal policy to restore the economy to potential real GDP.Assuming a constant price level,Congress and the president would need to increase government purchases by

• A)$500 billion.
• B)less than $500 billion.
• C)more than $500 billion.
• D)None of the above are correct.Congress must act to decrease government purchases in this case.

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Definitions:

Marginal Propensity

Refers to the ratio of the change in an individual's consumption to the change in their income.

Disposable Income

Money available to households for personal spending and saving after deducting their income taxes.

Income-Expenditure Framework

An economic model describing the relationship between an economy's total income and the spending levels that determines its equilibrium output.

Aggregate Expenditures

The total amount of spending in an economy, including consumption, investment, government spending, and net exports.