Answer:
Government should use expansionary policy to increase spending by $20 billion or decrease taxes by $25 billion or use a balanced budget policy of increasing taxes and spending by $100 billion.
Explanation:
GDP gap = Real potential GDP -actual real GDP = $400 billion - $300 billion = $100 billion
Multiplier = 1/(1-MPC) = 1/(1-0.8) =5 . The required change in spending to eliminate gap = Gap/multiplier = $100 billion / 5 = $20 billion
Tax multiplier = -MPC / (1-MPC) = -0.8/(1-0.8) = -4
Points are: The required change in taxes to eliminate =100/(-4) = -$25, the minus sign shows a decrease , the tax should be decreased by $25
