Final answer:
Reducing the federal deficit when the economy is near full employment would most likely lead to C) lower interest rates due to a contractionary effect on aggregate demand and reduced need for government borrowing.
Step-by-step explanation:
If the federal government reduces its budget deficit when the economy is close to full employment, the most likely result is that interest rates will decrease (C). When the government moves to reduce its deficit through spending cuts or tax hikes, it can have a contractionary effect on aggregate demand in the economy. This is due to the government pulling back on its contributions to the economy, which can slow down economic growth and reduce pressures on prices. Consequently, as the demand for government borrowing diminishes, there would be less upward pressure on interest rates, leading to a potential decrease in them.
Furthermore, reducing the deficit could lead to a stronger dollar internationally (E), as confidence grows in the government's fiscal management, and as demand for dollars may increase if investors anticipate lower interest rates in the future. Additionally, with reduced government borrowing, there may be more capital available for private investment. However, it is unlikely that inflation would increase (A), tax revenues would increase (B), or unemployment would decrease (D) as a direct result of deficit reduction under these conditions.