Given the macro economic data below, draw a graph to illustrate if there is arecessionary gap in the given economy.Real GDP $1000BConsumption (100K is Autonomous) $600BInvestment $100BGovernment Spending $200BExport $50BImport $50BMarginal Propensity to Consume 0.50AD (Expenditure) 45 degree  AD = AS$ 1000B AS (Real GDP)a. Calculate the size of the recessionary gap in the economy.b. What would happen to the recessionary gap if the government cut incometaxes by $50B? c. What would happen to the recessionary gap if the Fed increased discountrates? Explain your answer.

Question
Asked May 5, 2019
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Given the macro economic data below, draw a graph to illustrate if there is a
recessionary gap in the given economy.
Real GDP $1000B
Consumption (100K is Autonomous) $600B
Investment $100B
Government Spending $200B
Export $50B
Import $50B
Marginal Propensity to Consume 0.50

AD (Expenditure) 45 degree  AD = AS

$ 1000B AS (Real GDP)

a. Calculate the size of the recessionary gap in the economy.

b. What would happen to the recessionary gap if the government cut income
taxes by $50B? 

c. What would happen to the recessionary gap if the Fed increased discount
rates? Explain your answer. 

 

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Expert Answer

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Step 1

a.)

Recessionary gap:

Equilibrium GDP can be calculated as follows:

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Step 2

Figure -1

Figure -1 shows the recessionary gap.

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Step 3

b.

Tax multiplier:

Tax multiplier can be calcu...

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