Suppose the economy has a recessionary gap of $1,000B caused by a demand shock with unemployment is rising. You also know that the marginal propensity to consume is 0.75. Using the aggregate demand-aggregate supply model:

1. Draw a picture depicting the situation. (10 points)
2. Compute the multiplier. (10 points) (Show your work)
3. Would you use contractionary or expansionary fiscal policy? How much would you need to change government spending? (10 points) (Show your work)

Answer rating: 100% (QA)

Recessionary Gap and Policy Response Scenario Recessionary gap 1000 billion Demand shock Rising unem... View the full answer