Assume that the equilibrium real
The change to eliminate the recessionary gap when government spending and taxes both change by the same amount.
Explanation of Solution
To calculate recessionary gap when government spending and taxes both change by the same amount follow the steps
Step-1
Calculate the gross domestic product gap
Given Information:-
Real Gross Domestic Product
Potential Gross Domestic Product
Substitute the value in the mentioned formula:-
Step-2
Calculate the tax multiplier for the given data
Where MPS is marginal propensity to save that means the amount the consumers save from their income rather spending on goods and services.
MPI stands for marginal prosperity to invest.
MPC stands for marginal propensity to consume.
Here, given information:-
MPC is
MPS can be calculated as
Now substitute the value in the given formula in tax multiplier formula
The value of tax multiplier is
Step 3
Calculate the government spending multiplier
Now, formula for calculating multiplier is:-
Where MPS is marginal propensity to save that means the amount the consumers save from their income rather spending on goods and services.
MPI is stands for marginal propensity to invest.
Here, MPI is
MPS can be calculated as
Now substitute the value in the formula:-
The value of multiplier is
Step 4
Now to close the gap the combined effect of both government spending and tax cut will be
According to the question increase in government spending is of same amount as of Tax cut
Let's consider government spending as x, therefore tax cut will also be x
Substitute the value in the above equation:-
Calculate for x
Now to calculate the recessionary gap, add both the values of government spending and tax cut
Therefore,
Concept Introduction:
Gross Domestic Product is the total amount of finished products and services produced with in the country. It majorly calculates the
When real GDP is lower than the potential GDP, there occurs a recessionary gap. When an economy is forthcoming recession, recessionary gap occurs.
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- Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning