Final answer:
A government increase in taxes and a decrease in spending will result in a lower aggregate demand. The precise effect depends on the fiscal multiplier, which in this scenario, would lead to a total decrease of $15.55 billion in aggregate demand. The closest answer given the options would be that the impact is indeterminate as none of them align with the correct calculation.
Step-by-step explanation:
The question pertains to the field of macroeconomics within social studies, focusing on the concept of the fiscal multiplier, aggregate demand, and the impact of government fiscal policy on the economy. In the scenario provided where the government increases taxes by $10 billion and decreases spending by $5 billion, and with a marginal propensity to save of 0.1, we can infer a multiplier of 1/(1 - (1 - 0.1)) = 1/(0.9), which is approximately 1.11. The increased taxes will immediately decrease aggregate demand by $10 billion; however, the decreased spending means that not all the money taxed is re-injected into the economy. Therefore, only $5 billion of reduced spending needs to be multiplied through the economy. The net impact on aggregate demand would be the immediate $10 billion decrease less the multiplier effect of the $5 billion decrease in government spending, which equals $5 billion multiplied by the fiscal multiplier of 1.11, totaling $5.55 billion. Therefore, the overall decrease in aggregate demand is $10 billion (from taxes) + $5.55 billion (from spending reduction after multiplier) = $15.55 billion. The net effect on aggregate demand would be a decrease, but none of the provided answers accurately reflects the correct calculation, so the best choice among the given options is that the impact on aggregate demand is indeterminate.