Suppose Kittyville\'s full-employment GDP = $600 billion, and the current equili

Question

Suppose Kittyville's full-employment GDP = $600 billion, and the current equilibrium GDP = $400 billion. The MPC in this economy = 0.90. Identify the type of expenditure gap in Kittyville's economy: To correct this gap, Kittyville hires an economist, Kittyzen Keynes, who suggests: government spending or taxes. Suppose Kittyville decides to change government spending under Keynes' advice. By how much must government spending change to correct for the expenditure gap (rounded to nearest billion dollars)? Suppose Kittyville instead decides to change taxes under Keynes advice. By how much must taxes change to correct for the expenditure gap (rounded to nearest billion dollars)?

Explanation / Answer

Indentify the type of expenditure gap in Kittyville Economy Recessionary

To correct this gap, Kittyville hires an economist, Kittyzen Keynes, who suggests

Increasing Governent spending or Decreasing Taxes

Change in government spending

200 = (1/1-.9)Change in spending

200 = 10 * change in spending

Changein in spending = 200/10

                         = $20 Billion

Change in taxes

200 =.9/.1 change in Taxes

Change in taxes = $ 22.22 Billion

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