Question

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 0.05 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 inflationary 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 ​$60 billion.

Assuming that there are no direct expenditure offsets to fiscal​ policy, how much should the government increase​ taxes? ​$ nothing 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