In the nation of Economia, the economy is overheating and there is danger of inflation. The chief economist estimates that current income is $50 billion, the optimal level is $40 billion, and the multiplier is 4. If government wants to close the inflationary gap, it should reduce government spending by:

Question

Quizplus · Accepted Answer

The inflationary gap is $10 billion ($50 billion - $40 billion). With a multiplier of 4, the government should reduce spending by $2.5 billion ($10 billion / 4) to close the gap.

In the Nation of Economia, the Economy Is Overheating and There