(For d and e) Suppose the interest on the debt was $700 billion. If interest is paid domestically, 90% will be spent domestically (the remainder is spent on foreign goods). If interest is paid to the foreign sector, only 10% is spent here (the remainder is spent in foreign countries). Every dollar collected in axes to pay the interest cause domestic spending to fall 90 cents. The spending multiplier is 2. d) What is the net impact on GDP if all interest is paid domestically? e) What is the net impact on GDP if 20% of the interest is paid to the foreign sector?
Added by William J.
Step 1
Since every dollar collected in taxes to pay the interest causes domestic spending to fall 90 cents, the total decrease in domestic spending will be $630 billion x 0.9 = $567 billion. However, the spending multiplier is 2, which means that the total impact on GDP Show more…
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