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

Economics Nov 07, 2020

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

Expert Solution

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).

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