Questions: The following graph shows the aggregate expenditures line (AE) for an economy where current equilibrium output is 400 billion and full-employment output is 650 billion. The economy is experiencing a GDP gap with the absolute value of the gap equal to billion. To close the GDP gap would require a billion increase in government spending. Thus the spending multiplier for this economy is . On the graph, shift the AE line to show the change in the aggregate expenditures line necessary to close the GDP gap.

Solution Steps

The current equilibrium output is given as $400 billion, and the full-employment GDP is $650 billion.

The GDP gap is the difference between the full-employment GDP and the current equilibrium output. \[ \text{GDP Gap} = \text{Full-employment GDP} - \text{Current Equilibrium Output} \] \[ \text{GDP Gap} = 650 \text{ billion} - 400 \text{ billion} = 250 \text{ billion} \]

To close the GDP gap, we need to determine the required change in government spending. This requires knowing the spending multiplier. The spending multiplier (k) is typically calculated as: \[ k = \frac{1}{1 - MPC} \] where MPC is the marginal propensity to consume. However, since the MPC is not provided, we will assume the multiplier is given or can be derived from the context.

Assuming the spending multiplier is provided or can be derived, the required change in government spending (ΔG) can be calculated as: \[ \Delta G = \frac{\text{GDP Gap}}{k} \]

Final Answer