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In the following case, either a recessionary or inflationary gap exists. Assume that the aggregate supply curve is horizontal, so that the change in real GDP arising from a shift of the aggregate demand curve equals the size of the shift of the curve. Calculate the magnitude of both the change in government purchases of goods and services and the change in government transfers necessary to close the gap. a. Real GDP equals $100 billion, potential output equals $160 billion, and the marginal propensity to consume is 0.75.

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Answer:

This is a recessionary gap of $60 billion.

Simple multiplier = 1/ (1-.75) = 1/.25 = 4

The government would then have to increase its spending on goods and merchandise by total gap divided my simple multiplier.

$60 billion/ 4 = $15 billionTransfer multiplier - Each dollar of a Transfer payment will increase real GDP by Transfer Payment Multiplier

= MPC / (1-MPC) = 0.75 / (1-0.75) = 0.75/0.25 = $3

The government must increase spending on transfer payments by total gap divided by transfer payment multiplier = $60 billion / $3 = $20 billion

An inflationary gap exists in economics and is when the actual GDP exceeds the full-employment GDP.  

  • It is one sort of output gap. This concept was given by J.M  Kenkeys. It was used to solve problems during the financial wars.
  • The major cause of this gap is due to expansionary monetary policies which were carried out by the government. It is a signal that the economy is into the boom part of the trade cycle.

A. recessionary; increase

B. $15 - M = 4x so 60/4 = 15 billion.

C. $20 - the multiplier = 3x (multiplier into MPC) so 60/3 = 20 billion.

Learn more about whether a recessionary or inflationary gap exists.

brainly.in/question/40724773.