Suppose the U.S. government plans a new fiscal stimulus by cutting taxes by $10 billion....
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Suppose the U.S. government plans a new fiscal stimulus by cutting taxes by $10 billion. And suppose that to avoid a government budget deficit, the government will also cut government spending by $10 billion. Use the Keynesian cross analysis to compute what effect this combined policy will have on output. Show your work or explain your reasoning. Assume consumption in the economy can be described by the consumption function: C = $10 bil+ 0.9(Y-T), where Y is total national income and T is taxes. Assume that investment is exogenous, so it is not a function of the interest rate.
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