Part Il: Short-Answer Questions (28 points) ided. Show your Please·nswer the fol
ID: 1112298 • Letter: P
Question
Part Il: Short-Answer Questions (28 points) ided. Show your Please·nswer the following questions in the space prov level is constant, 19. Consider a country called Sweetland. Assume that the aggregate price the interest rate is fixed, and diagram shows the current macroeconomic situation for the economy in this country. The accompanying of Sweetland. Assume that the GDP gap in this country can be closed by a $80 Million changes in government spending. It has been observed that each time disposable income increases country by Si, consumption increases by s0.95. This consumption ineludes the in this 50.05 of each dollar that they spend on imports. Figure 3 price level LRAS SRAS ADI 'Potential Real GDP 19a. Calculate the spending multiplier. 1%. Calculate the value of the GDP gap. Calculate the value of the potential GDP if the economy is currently in equilibrium ith an income level of $900 Million.Explanation / Answer
19.
A.
MPC for domestic consumption = .95 - .05 = .9
Spending multiplier =1/(1-MPC) = 1/(1-.90) = 10
B.
Value of GDP gap = government spending * spending multiplier = 80*10 = $800 Million
C.
Value of potential GDP = GDP at present + GDP gap = 900+800 = $1700 Million