Question

Suppose the government wants to reduce the level of consumption and increase private investment such that the level of GDP remains unchanged and at the same time the size of the federal budget deficit declines. The appropriate economic policy or policy combinations that can help achieve these goals are...

a) Increase government spending and cut taxes
b) Raise interest rates and reduce government spending
c) Increase taxes and government spending
d) Cut private investment and raise interest rates

Answer 1

The appropriate economic policy or policy combinations that can help achieve these goals are raising interest rates and reducing government spending, or cutting private investment and raising interest rates.

Step-by-step explanation:

The appropriate economic policy or policy combinations that can help achieve the goals of reducing consumption, increasing private investment, and decreasing the size of the federal budget deficit while keeping the level of GDP unchanged are:

1. Raise interest rates and reduce government spending: Higher interest rates discourage borrowing and private consumption, which can lead to increased private savings and reduced consumption. Additionally, reducing government spending can help decrease the budget deficit.
2. Cut private investment and raise interest rates: By cutting private investment, less money is spent on consumption, thus reducing the level of consumption. Raising interest rates can also discourage borrowing and consumption.