Suppose the economy is operating at an output level of $5,400 billion. Assume furthermore that potential output is $5,000. Which
1 answer:
Answer:
The government should decrease spending by $100 billion.
Explanation:
The potential output level of an economy is $5,000 billion.
The economy is operating at an output level of $5,400 billion.
We see that there is an inflationary gap of $400 billion as the economy is operating at an output level of $400 billion more than the potential output level.
The marginal propensity to consume is 0.75.
ΔY =
$400 billion =
ΔG =
ΔG = $100 billion
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