hw4_output gap_sol.docx - SSE104 HW 4 Name Date Output Gap...

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SSE104 HW 4 Name: _______________________ Date:___________ Output Gap and Spending Multiplier Country ABC is experiencing the following situation. Its current aggregate demand is illustrated as AD, producing $10 trillion worth of output. Suppose that the full employment output level/potential output of this country is $8 trillion. Suppose MPS=0.10 and MPI=0.10 a) Is there an inflationary output gap or recessionary output gap? Inflationary output gap b) Label in the above diagram the output gap and indicate the size of the output gap c) If you were to decrease the AD, how large should the decrease in the AD (at the current price level) be
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