A negative AD shock occurs in the economy, causing equilibrium short run rGDP to

Question

A negative AD shock occurs in the economy, causing equilibrium short run rGDP to fall $240 below the long run level of output. The MPC in this economy is 0.5, there are no income taxes, and the government wants to close the output gap by increasing transfers TR. The economy faces a sticky wage (that is, NOT a sticky-price) SRAS. By how much must transfers rise to close the gap?

a. Transfers must rise by less than $240

b. Transfers must rise by exactly $240

c. Transfers must rise by more than $240

Explanation / Answer

A Transfers must rise by less than $240

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