Textbook Problem

Assume that full-employment real GDP is Y = $1,200 billion, the current equilibrium real GDP is Y = $1,600 billion, and the MPC = 0.8. To bring the economy to a full-employment real GDP,

1. a. a recessionary gap must be bridged by increasing aggregate expenditures by $80 billion.
2. b. an inflationary gap must be bridged by cutting aggregate expenditures by $80 billion.
3. c. nothing is needed to bring the economy into full-employment equilibrium.
4. d. a recessionary gap must be bridged by increasing aggregate expenditures by $400 billion.
5. e. an inflationary gap must be bridged by cutting aggregate expenditures by $400 billion.