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Homework answers / question archive / Suppose the real GDP in a fictional economy currently equals to 160 million USD, the potential real GDP equal to 180, and the government expenditures multiplier is 4
Suppose the real GDP in a fictional economy currently equals to 160 million USD, the potential real GDP equal to 180, and the government expenditures multiplier is 4. The government has to increase its expenditures by ........... in order to bring back the economy to its long-run real GDP equilibrium
Equilibrium gdp = 160 mn
potential gdp = 180 mn
Required change in real gdp = 180-160 = 20 mn
Government multiplier= change in real gdp/ change in government spending
4 = 20/ change in government spending
Therefore, required change in government spending= 20/4 = 5mn = 5000000
( please note that I don't know if you have to take million in account. So, if 5 million doesn't work, please change the answer to 5).
