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balu736 [363]
2 years ago
5

An economy is operating with output $200 billion above its natural level, and fiscal policymakers want to close this expansionar

y gap. The central bank agrees to adjust the money supply to hold the interest rate constant, so there is no crowding out. The marginal propensity to consume is 4/5, and the price level is completely fixed in the short run.
To close the expansionary gap, the government would need to decrease or increase spending by ? billion.
Business
1 answer:
koban [17]2 years ago
6 0

Answer and Explanation:

In order to close the inflationary gap, the government should have to reduce the spending

The multiplier is

= 1 ÷ MPS

= 1 ÷ (1 ÷ 5)

= 5

Now the government spending would be reduced by

= $200 billion ÷ 5

= $40 billion

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