A. Reference: Ref 13-12 B. Scenario: Fiscal Policy Consider the economy of Arcad

Question

A.

Reference: Ref 13-12

B.

Scenario: Fiscal Policy
Consider the economy of Arcadia. The households of Arcadia spend 75% of their income. There are no taxes and no foreign trade. The currency of Arcadia is called the arc. The level of potential output in Arcadia is 600 billion arcs.

Reference: Ref 13-12

(Scenario: Fiscal Policy) Refer to the information provided in the scenario. Suppose that actual output is 700 billion arcs, and the government of Arcadia decides to tax its citizens. To bring the economy to potential output, the government should: increase taxes by 33.33 billion arcs. keep taxes at zero. decrease taxes by 33.33 billion arcs. decrease both taxes and government spending by 0.33 billion arcs.

Explanation / Answer

increase taxes by 33.33 billion arcs---correct answer---------100%sure.

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Decrease government spending by $10 billion------correct answer---------100%sure.

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