(Scenario: Fiscal Policy)Refer to Scenario: Fiscal Policy.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:
A) increase taxes by 33.33 billion arcs.
B) increase taxes by 3.33 billion arcs.
C) keep taxes at zero.
D) increase both taxes and government spending by 0.33 billion arcs.

Question

Quizplus · Accepted Answer

The government should increase taxes by 33.33 billion arcs to bring the economy to potential output. This is because the government's tax revenue is currently 33.33 billion arcs below its potential, and increasing taxes by this amount would close the output gap.