Recent events have made it clear that the economy is likely experiencing an output gap. Looking for technical assistance, the Government has hired you as a consultant to identify the existing output gap and propose a fiscal policy package to eliminate it.

The government's primary concern is that the economy returns to long-run equilibrium, and it has identified three possible ways of accomplishing this:

Policy 1:Increasing or decreasingonlygovernment spending

Policy 2:Increasing or decreasingonlytaxes

Policy 3:Increasing or decreasingbothgovernment spending and taxes, while maintaining a balanced budget

The Government, however, does not know how large (meaning the amount by which government spending and/or taxes must be adjusted) each policy should be. While conducting your analysis, you identify that the government spending multiplier is 2.5, and that the tax multiplier is -0.5.

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