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A government is currently operating with an annual budget decit of $40 billion. The government has determined that every $10 billion reduction in the amount
A government is currently operating with an annual budget decit 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 0.05 percentage point. Furthermore, it has determined that every 0.10 (one-tenth) 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 0.80. Finally, the government knows that to eliminate an inationary gap and take into account the resulting change in the price level, it must generate a net leftward shift in the aggregate demand curve equal to $40 billion. Assuming that there are no direct expenditure offsets to fiscal policy, how much should the government increase taxes? $ 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
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