Q.4

1. Due to the current crisis the government has announced a tax cut. The tax cut causes an increase in the budget deficit and therefore, will fail to stimulate aggregate demand.Comment on this statement. In your answer explain the effect of such a tax cut on interest rates, money supply, and private domestic saving.

1. Assume the government announces plans for an expansionary fiscal policy that is likely to result in increased government borrowing in the US. What effect should this have on aggregate consumption, money supply, the income velocity of money, the trade deficit, and savings for the US?