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an economy’s potential output is equal to $2.40 trillion, and its current output is equal to $2.42 trillion. if the marginal propensity to consume has a value of 0.4, then the government should decrease spending by ________ billion to return the economy to the long-run equilibrium.

Respuesta :

Parrain

Based on the current economic output and the potential output, the government should decrease spending by $12 billion.

First find the difference between the potential output and the current output:

= 2.42 - 2.40

= $0.02 trillion

= $20 billion

Then find the expenditure multiplier:

= 1 / ( 1 - Marginal propensity to consume)

= 1 / ( 1 - 0.4)

= 1.67

The government should reduce spending by:

= Difference between potential and current / Multiplier

= 20 / 1.67

= $12 billion

In conclusion, the government should reduce spending by $12 billion.

Find out more at https://brainly.com/question/25403317.

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