Question: Assume an economy is in recession with a MPC of 0.70 and there is a GDP gap of $300 billion. How much government spending must increase to eliminate the GDP gap? Instead of increasing government spending by the amount you calculate, what would be the tax cut required to achieve elimination of the GDP gap? Discuss how and why the spending multiplier and the tax multiplier are different. See Chapter 34, pages 768-769, for an explanation of the spending multiplier (for the tax multiplier, Google it, or ask questions in the discussion threads).

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