Question

X Text Problem 13-12 Question Help 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 reduce the market interest rate by 0.10 percentage point. Furthermore, it has determined that every 0.10 (one fenth) percentage point change in the market interest rate generates a change in planned Investment expenditures in the opposite direction equal to $4 billion. The marginal propensity to consume is 0.75. Finally, the government knows that to eliminate an inflationary gap and take into account the resulting change in the price level it must generate a nel lellward shift in the aggregate demand curve equal to $20 billion het interest rate generate market interest rate by 0 10 of S40 billion. The government has Assuming that there are no direct expenditure offsets to fiscal policy, how much should the government increase taxes? $ 1429 billion (Enter your response rounded to two decimal places) Hint How much new private investment spending is induced by each $10 billion decrease in government spending?

Answer 1

trees that reduces aggregate . Let demand a dollon increas in by $20 bn. increase in tax to a dollo in AD caused due м с –ma xx 0175 m - 1-02) borvoning x dollar invese will cause the gort- decline by x dollars & that will in twn care purate investment to fall by o se dollars Change in Al caused by 0.5&collons 0 - 1 2-то хо гу Fotos x0.5m= 2. Total change in HD (3) +(24) = – $20 bn. = $20 billion ~ $20.00 billion