If the MPS is .25 and the economy has a recessioionary expenditure gap of $5 billion, then equilibrium GDP is?

Expert Answers

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If you are asking what they actual number is for the equilibrium GDP, we cannot tell that from the information given.  We know how much the government must spend to close the recessionary gap, and we can tell how much GDP will go up when the government spends this much.  But we have no way of knowing what the actual GDP will be.

To find out how much the GDP will go up, we use the multiplier.  It is 1/mps.  So in this case our multiplier is 4 (1/.25).

So if government has to spend $5 billion more, then GDP will go up by $20 billion.  This means that the economy is currently $20 billion below equilibrium GDP (but we still do not know what that number is).

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