How much tax eliminate output gap?

Question

If short-run equilibrium output equals 10 000, the income-expenditure multiplier equals 5, the MPC equals .8, and potential output (Y*) equals 9000, then taxes must be increased by ________ to eliminate any output gap.

20

200

225

250

Answer 1

d) 250

M=ΔY/ΔT= -MPC/(1-MPC) = -0.8 / (1-0.8) = -0.8/0.2 = -4

ΔY= 9'000 - 10'000 = -1'000

-1'000 / ΔT = -4

ΔT = -1'000 / -4 = 250