Arsenal's ninth victory in London derbies this season, a new English league record, took them to 69 points from 28 games with reigning champions City on 61 having played a game fewer.
Mikel Arteta's Arsenal side bowed out of the Europa League on penalties to Sporting on Thursday but a sixth successive Premier League win looked in the bag by halftime with Martinelli opening the scoring from Saka's pass in the 28th minute.
Saka doubled the lead in the 43rd when he guided home a low shot beyond Palace's teenaged goalkeeper Joe Whitworth after being played in by Ben White's pass.
Arsenal were running riot when Xhaka made it 3-0 10 minutes into the second half after an assist by Leandro Trossard.
Schlupp replied just past the hour and there were a few jittery moments with Wilfried Zaha firing inches wide before Saka made sure with his 12th league goal of the season in the 74th, guiding in a first-time shot from Kiernan Tierney's pass.
Palace, who sacked manager Patrick Vieira this week and are without a win in 2023, stay in 12th place but are only three points above the relegation zone.
With Spring in the air in north London there was a feeling of euphoria at the final whistle with Arsenal now assured of an eight-point lead going into April as the season pauses briefly for England's Euro 2024 qualifiers against Italy and Ukraine.
"Very happy, we needed that win and, as I always say, we approach the games as a final and we did that today," Martinelli, who missed a penalty in the shootout against Sporting in midweek, said.