Exercise for practicing, Schemes and Mind Maps of Mathematical Methods

1. The initial information of an economy is given as below:

Y1 = 1000; Yp = 1180; MPC= 0,75;

How does the government do with fiscal policy?

Output Gap =Yp−Y1=1180−1000=180

The fiscal multiplier (k) is calculated using the Marginal Propensity to Consume (MPC):

k= 1/(1-MPC) =1/(1-0.75)=4

ΔG=Output Gap/k=180/4=45

→ to close the output gap of 180 units, the government should increase its spending by

45 units.