What is the impact on investment

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Why does the way the government uses a surplus make a difference for investment spending? Consider the following scenarios:

(a) Assume the government reduces income taxes. What is the total impact on national saving, taking into account the reduction in the surplus and the change in private saving? What is the impact on investment? (Hint: How does your answer depend on the sensitivity of saving to the interest rate?)

(b) Assume the government increases expenditures. What is the total impact on national saving, taking into account the reduction in the surplus and the change in private saving? What is the impact on investment? (Hint: How does your answer depend on the type of expenditures the government increases?)

Reference no: EM131142105

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