Suppose the government decides for tax cut next year by an amount equal to $2 billion...

Suppose the government decides for tax cut next year by an amount equal to $2 billion a year. Along strictly monetary theory lines, using as your framework the equation of exchange, analyze the effect on money income, prices, and interest rates under three alternative sets of circumstances:

1.	The cut in taxes is accompanied by an equal increase in the deficit, which is fully

financed by increasing the money stock at a rate of $2 billion a year more than it would otherwise have been increased.

2.	The cut in taxes is accompanied by an equal increase in the deficit, which is

financed by borrowing from the general public with no effect on the stock of money.

3.	The cut in taxes is accompanied by an equal cut in government expenditures, so

there is no change in the deficit.

Expert Solution

Rahul Sunny answered 2 years ago

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