A government is currently operating with an annual budget deficit of $40 billion. The government has determined that every $10 billion reduction in…
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A government is currently operating with an annual budget deficit of $40 billion. The government has determined that every $10 billion reduction in the amount of bonds it issues each year would reducethe market interest rate by 0.05 percentage point. Furthermore. it has determined that everyr 0.10 (one-tenth} percentage point change in the market interest rate generates a change in plannedinvestment expenditures in the opposite direction equal to $4 billion. The marginal propensity to consume is 0.75. Finally, the govemment knows that to eliminate an inflationary gap and take into accountthe resulting change in the price level, it must generate a net leftward shi‘i’t in the aggregate demand curve equal to $40 billion. Assuming that there are no direct expenditure ofisets to fiscal policy. how much should the government increase taxes? $ Hllion.(Enter your response rounded to Me decimai places.) Hint: How much new private investment spending is induced by each 510 biii‘ion decrease in government spending?
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