Final answer:
The government raises the needed $500 billion through borrowing, as government spending exceeds tax revenues, causing negative public savings and making the government a demander of financial capital. Large-scale government spending can impact the national savings and investment identity and the broader economy in various ways including potentially leading to full employment level of GDP.
Step-by-step explanation:
Where does the government get the $500 billion so it can increase government spending (G)? To address this, governments need to acquire financial capital when their expenditures exceed their revenues, leading to negative public savings (T – G). The government can become a demander of financial capital, necessitating borrowing the difference (G – T).
When the government decides to raise spending by a certain sum, for instance, $500 billion, it influences the national savings and investment identity, which can be expressed as I = S + (T-G) + (M-X), wherein I stands for Private Investment, S for Private Savings, T for Taxes, G for Government Spending, M for Imports, and X for Exports.
An increase in G while holding other factors constant would mean an increase in demand for funds, which could result in higher borrowing, a decrease in private investment, a reduction in private savings, or a worsening of the trade balance.
Furthermore, such an increase in government spending is significant and typically has a persistent impact year after year. It can change economic conditions by potentially leading to full employment level of GDP. However, the way by which this money is sourced can have various implications for the economy, including the possibility of increased national debt or changes in economic behaviors.