Suppose that real GDP is currently $17.1 trillion, potential GDP is $17.4 trillion, the government purchases multiplier is 2, and the tax multiplier is –1.6.
a. Holding other factors constant, by how much will government purchases need to be increased to bring the economy to equilibrium at potential GDP?
b. Holding other factors constant, by how much will taxes have to be cut to bring the economy to equilibrium at potential GDP?
c. Construct an example of a combination of increased government spending and tax cuts that will bring the economy to equilibrium at potential GDP.