Final answer:
Reducing the federal budget deficit when the economy is close to full employment is most likely to result in decreased interest rates and an increased international value of the dollar, while also having a potential contractionary effect on aggregate demand.
Step-by-step explanation:
If the federal government reduces its budget deficit when the economy is close to full employment, the most likely result will be that interest rates will decrease. This is because when the government borrows less, there is lesser demand for funds in the financial markets, which typically leads to lower interest rates. Conversely, demand for loans could decrease as the government is not competing as much for financial resources, thus lowering the cost of borrowing for others. Additionally, one could expect the international value of the dollar to increase, as lower deficits can enhance investor confidence and decrease the need for the government to borrow from foreign investors, potentially strengthening the dollar's value on the global market.
Tackling deficits through spending cuts and tax increases can be politically challenging and might have a contractionary effect on aggregate demand in the economy, which, in turn, could mitigate inflation pressures by slowing economic growth. It's also important to note that while higher tax revenues may seem like an immediate result, this would primarily depend on the nature of tax reforms and the overall state of the economy following fiscal consolidation.