Final answer:
To achieve a fiscal restraint of $100 billion with an MPC of 0.75, the government must reduce spending by $25 billion due to the multiplier effect of 4.
Step-by-step explanation:
Given that the marginal propensity to consume (MPC) is 0.75, to achieve an initial fiscal restraint of $100 billion, one must understand the concept of the fiscal multiplier. The fiscal multiplier is the ratio of a change in national income to the change in government spending that causes it. With an MPC of 0.75, the multiplier is calculated as 1/(1 - MPC) = 1/(1 - 0.75) = 4. Hence, a decrease in government spending of $25 billion would be initially required.
To achieve a fiscal restraint of $100 billion, the government needs to reduce its spending by a quarter of the desired fiscal restraint on account of the multiplier effect. That's because every dollar of government spending cut would be multiplied by 4 in the economy. Therefore, a reduction of $25 billion in government spending would generate the desired total restraint of $100 billion in the economy after the multiplier effect is considered.