Priceyland is experiencing an inflationary gap from 2012 to 2013. The MPC is 0.75.

1. Draw Priceyland as it moves from equilibrium to the inflationary gap. Label equilibrium PL and Yfe.
2. The nominal GDP in 2013 was $500 million and the deflator was 125. What was the real GDP in 2013?
3. The government decides to close the inflationary gap of $200 million by decreasing government spending. How much would the government have to decrease spending by?
4. If the government decided to increase taxes to close the gap, by how much would taxes increase?
5. Are you answers to parts c and d the same, or different? Why