Use the Following to Answer Questions

question 160

Multiple Choice

Use the following to answer questions :
Scenario: Fiscal Policy
Consider the economy of Arcadia. Its households spend 75% of increases in their income. There are no taxes and no foreign trade. Its currency is the arc. Potential output is 600 billion arcs.
-(Scenario: Fiscal Policy) Look at the 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.

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Definitions:

Compounded Quarterly

A method of calculating interest where the interest is added to the principal amount four times a year.

Present Value

The now value of a future cash sum or chain of cash flows, with a specified rate of return.

Loan Payments

Regular payments made to repay borrowed money, typically including both principal and interest components.

Ordinary General Annuity

A sequence of uniform payments made at consistent intervals, where interest is calculated and added at each period's conclusion.