Suppose the economy is operating at an output level of $5,400 billion. assume furthermore that potential output is $5,000. which would be necessary to close this inflationary gap if the marginal propensity to consume is 0.75?

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