Deficits and investment: Suppose the government decides to reduce taxes todayby 1% of GDP, fnanced by higher borrowing, with the borrowing to be repaid10 years from now with higher taxes. Discuss the various arguments aboutwhat efect this will have on the investment rate today.

MACROECONOMICS
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ISBN:9781337794985
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Chapter11: Managing Aggregate Demand: Fiscal Policy
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Deficits and investment: Suppose the government decides to reduce taxes today
by 1% of GDP, fnanced by higher borrowing, with the borrowing to be repaid
10 years from now with higher taxes. Discuss the various arguments about
what efect this will have on the investment rate today.

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Step 1

When the savings done by the government is negative, it is said as the budget deficit. It is a situation in which the government spending is more than the revenue collected from taxes.

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