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 = [tex]\frac{1}{1 - MPC}\ \times\ \Delta G[/tex]
$400 billion = [tex]\frac{1}{1 - 0.75}\ \times\ \Delta G[/tex]
ΔG = [tex]\frac{400}{4}[/tex]
ΔG = $100 billion
