Suppose the inflation premium is 2 percent and the nominal interest rate is 1 percent. Instructions: In part a, enter your answe
1 answer:
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Answer:
tax increased = $22.22 billion
so correct option is 3. increase taxes by $22.22 billion.
Explanation:
given data
real GDP = $500 billion
employment GDP = $300 billion
marginal propensity = 0.9
solution
we know here that Inflationary gap will be
Inflationary gap = Real GDP - Full-employment GDP
Inflationary gap = $(500 - 300) billion
Inflationary gap = $200 billion
and tax Multiplier is
Tax Multiplier =
Tax Multiplier = -9
here negative sign means that decrease real GDP by $9
so tax should be increased by $1
so we can say that decrease real GDP by $200 billion
and tax should be increased =
tax increased = $22.22 billion
so correct option is 3. increase taxes by $22.22 billion.