Answer: Option (b) is correct.
Explanation:
Given that,
short-run equilibrium output = 10,000
income-expenditure multiplier = 10
potential output (Y*) = 9,000
Expenditure multiplier = [tex]\frac{1}{1-slope\ of AE function}[/tex]
10 = [tex]\frac{1}{1-slope\ of AE function}[/tex]
Slope of AE function = 0.9
slope of AE = MPC (1-t) t =0,
MPC = 0.9
Delta Y (DY) = 1000
government expenditure multiplier ⇒ [tex]\frac{1}{1 - MPC}[/tex] = 10
Delta G = [tex]\frac{DY}{government\ expenditure\ multiplier}[/tex]
= [tex]\frac{1,000}{10}[/tex]
= 100
Government purchases must be Decrease by 100.
