Since G=T with a balanced budget, savings will still fall until I's again, but the expansion of government achieves the goal of replacing the shortfall in aggregate expenditures, albeit with new, higher taxes.

In our case, the increased proceeds from taxes will have to amount to $30 million, in order to set-off the increase in government spending and to maintain the same GDP. The increase in government expenditures will fully offset the negative impact of taxes.

If only $100 million are spent by the government, the rest of $50 million will have to come from tax cuts. The effect will be the total elimination of the $1.5 trillion aggregate demand.

Question 6.

1. Deposit Expansion Multiplier

While a single bank can only lend its excess reserves, the banking system can increase the money supply by a multiple of initial excess reserves.

Deposit expansion multiplier = 1/(reserve requirement)

The initial assumption...
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