Consider the economy of Arcadia. The households of Arcadia spend 90% of their income. There are no taxes and no foreign trade. The currency of Arcadia is called “Arcs”. The level of potential output in Arcadia is 700 billion arcs. Suppose that actual output is 600 billion arcs, and the government of Arcadia decides to tax its citizens. In order to take the economy to potential output, the government should:
decrease taxes by 11.1 billion arcs.
increase taxes by 11.1 billion arcs.
decrease taxes by 10 billion arcs.
increase taxes by 9 billion arcs.