Final answer:
Government spending of 50 billion will increase aggregate demand, which may raise output and price levels and can potentially boost employment. A tax cut that raises aggregate demand can lead to inflation if the output is at full capacity. A rise in the budget deficit under Ricardian equivalence typically leads to increased private savings, a reduced trade deficit, or decreased investment.
Step-by-step explanation:
When the government implements a 50 billion dollar spending package, it injects money into the economy, which is expected to increase overall aggregate demand. If consumers save 25 percent of their disposable income, the initial increase in aggregate demand will not be the full 50 billion, due to the marginal propensity to consume being less than one. However, the initial spending will generate further rounds of spending (multiplier effect), as recipients of the government spending will further spend their income, pay taxes, save, and spend on imports.
Regarding the scenario outlined, a government tax cut that raises aggregate demand by 50 at every price level leads to a new equilibrium where demand and supply match at a higher level of output and likely at a higher price level. This increase in output could result in higher employment as firms hire more workers to meet the increased demand for their products and services. However, if the output is at full capacity, the primary effect might be on prices, potentially leading to inflation. The exact effect will depend on the economic context, such as the slope of the aggregate supply curve.
In the context of the national saving and investment identity, if Ricardian equivalence holds, a rise in the budget deficit can lead to a corresponding increase in private savings or a decrease in the trade deficit or investment. Private savings may increase to offset the future tax burden anticipated due to the higher deficit, and investment might fall if the government borrowing crowds out private investment by raising interest rates.