During the 1990s, the size of the federal government debt

became so large that servicing the interest payments became a
significant portion of total federal expenditure. In response, many
representatives and senators felt that the federal deficit needed to
be reduced. If government spending (G) becomes negatively sensitive
to changes in the interest rate, what effect does this have on
autonomous consumption and planned investment that is crowded out? If
autonomous taxes (Ta) become positively sensitive to changes in the
interest rate, what effect does this have on the amount of autonomous
consumption and planned investment that is crowded out?

Do a little research, then take a shot. What do you think?

When government spending (G) becomes negatively sensitive to changes in the interest rate, it means that as the interest rate increases, the government reduces its spending. This can have an effect on autonomous consumption and planned investment that is crowded out.

1. Autonomous consumption: Autonomous consumption refers to the portion of consumption that is independent of income. If government spending decreases due to higher interest rates, it can potentially reduce overall economic activity. People's income may be affected, leading to a decrease in autonomous consumption as individuals have less disposable income to spend.

2. Planned investment that is crowded out: Planned investment refers to the expenditure on capital goods by businesses to increase production capacity. When government spending is reduced due to higher interest rates, it can lead to a decrease in economic activity. This can result in lower business revenues and profitability, making businesses more cautious about investing in new capital projects. As a result, planned investment may be crowded out or reduced.

Now, if autonomous taxes (Ta) become positively sensitive to changes in the interest rate, it means that as the interest rate increases, autonomous taxes also increase. This has an effect on the amount of autonomous consumption and planned investment that is crowded out.

1. Autonomous consumption: When autonomous taxes increase due to higher interest rates, individuals have less disposable income available for consumption. As a result, autonomous consumption may decrease since people have less money to spend.

2. Planned investment that is crowded out: With higher autonomous taxes, businesses may experience lower profits and reduced cash flow, limiting their ability to invest in new capital projects. This can lead to a decrease in planned investment as businesses prioritize paying higher taxes over investing in growth.

In summary, when government spending becomes negatively sensitive to the interest rate, autonomous consumption and planned investment can be crowded out. Similarly, when autonomous taxes become positively sensitive to the interest rate, it can also affect the amount of autonomous consumption and planned investment that is crowded out.