If planned aggregate expenditure (PAE)in an economy equals 4,000 + 0.6Y and potential output (Y*)equals 9,800,taxes must be increased by ________ (rounded to the nearest whole number)to eliminate any output gap.

Question

Quizplus · Accepted Answer

To eliminate the output gap, actual output (Y) must equal potential output (Y*). Set PAE equal to Y* and solve for Y. Then, calculate the change in taxes needed to adjust Y to Y* using the tax multiplier formula.

If Planned Aggregate Expenditure (PAE)in an Economy Equals 4,000