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An economy is operating with an output that is $600 billion dollars above its natural rate of $2400 billion dollars and fiscal policy makers want
An economy is operating with an output that is $600 billion dollars above its natural rate of $2400 billion dollars and fiscal policy makers want to close the inflationary gap. The central bank agrees to hold the interest rate constant so there is no crowding out. The marginal propensity to consume is 3/4. In which direction and by how much would the government spending need to change to close the gap? Fully explain your answer and provide a graph that shows the initial situation.
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