Answer: The recessionary gap will be equal to 1 trillion yen divided by 2.5 or 0.4 trillion yen
Explanation:
From the question, we are informed that GDP gap of 1 trillion yen and the marginal propensity to consume (MPC) is 0.60. Also, to close the GDP gap, the prime minister has decided to increase government spending. This means that there will be a recessionary gap because the actual GDP will be less than the potential GDP.
Fir the economy to be brought to its potential GDP, the spending of the government will give a stimulus to the economy. Since MPC is 0.6, the multiplier will be:
= 1/1-MPC
= 1/1 - 0.6
= 1/0.4
= 2.5
The government spending will then increase in order to close the recessionary gap as:
∆Y = ∆G × Multiplier
100 = ∆G × 2.5
∆G = 100/2.5
∆G = 40
Therefore, the recessionary gap will be equal to 1 trillion yen divided by 2.5 or 0.4 trillion yen.
The advice that the economic council has to give to the PM is that the gap is equal to 1 trillion yen divided by 2.5 or 0.4 billion
Given that the GDP gap is a trillion, the spending of the government has to be raised in order to close this gap.
This shows the presence of recession in the economy.
We find the multiplier.
[tex]Multiplier=\frac{1}{1-MPC} \\\\= \frac{1}{1-0.6} \\\\\\= \frac{1}{0.4}[/tex]
= 2.5
To close this gap,
ΔY = ΔG * multiplier
100 = ΔG * 2.5
ΔG = 100/2.5
= 40
The advice that the economic council has to give to the PM is that the gap is equal to 1 trillion yen divided by 2.5 or 0.4 billion
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