5. Assume a simple closed Keynesian model where the MPC is 0.9 and the MPIM is...

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5. Assume a simple closed Keynesian model where the MPC is 0.9 and the MPIM is 0.1. Also assume that potential real GDP is $2000 million, while actual (equilibrium) real GDP is $1600 million. a. What is the GDP gap? b. Is there an inflationary or recessionary gap? c. What change in government spending is required to restore the economy to full employment GDP? Show graphically using a Keynesian cross diagram. d. What change in lump-sum taxes would bring about the same result? e. Now assume that a Balanced Budget Amendment is passed, so that increases in government spending must be accompanied by equal increases in lump-sum taxes. What change in both G and T will close the GDP gap? (HINT: What is the balanced budget multiplier in this model?) f. Of the changes in c), d) and e), which causes the largest increase in the deficit? Why? 5. Assume a simple closed Keynesian model where the MPC is 0.9 and the MPIM is 0.1. Also assume that potential real GDP is $2000 million, while actual (equilibrium) real GDP is $1600 million. a. What is the GDP gap? b. Is there an inflationary or recessionary gap? c. What change in government spending is required to restore the economy to full employment GDP? Show graphically using a Keynesian cross diagram. d. What change in lump-sum taxes would bring about the same result? e. Now assume that a Balanced Budget Amendment is passed, so that increases in government spending must be accompanied by equal increases in lump-sum taxes. What change in both G and T will close the GDP gap? (HINT: What is the balanced budget multiplier in this model?) f. Of the changes in c), d) and e), which causes the largest increase in the deficit? Why?

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a The GDP gap is the difference between potential GDP and actual GDP Given potential GDP is 2000 mil... View the full answer