Suppose that real gdp is currently $13.55 trillion and potential real gdp is $14.0 trillion, or a gap of $500500 billion. the government purchases is 5.05.0, and the tax multiplier is 4.04.0. holding other factors constant, by how much will government purchases need to be increased to bring the economy to equilibrium at potential gdp?

$100 billion

Explanation:

Real GDP is currently = $13.55 trillion

Potential real GDP = $14.0 trillion

Gap = $500 billion

Government purchases multiplier = 5.0

Tax multiplier = 4.0

To increase aggregate demand by $500 billion, the required increase in government expenditure is:

= (1 ÷ government purchases multiplier) × change in aggregate demand

= (1 ÷ 5) × $500

= $100 billion

Therefore, the government expenditure need to be increased by $100 billion.

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