Suppose that the autonomous level of consumption is $70 billion per year, the marginal propensity to consume is .9, investment demand is $900 billion, government spending is $600 billion, and lump-sum taxes are $660 billion per year. Let exports be equal to imports at $500 billion.
Now suppose that exports surge by $125 billion. The government is worried about the effects on inflation because the economy is already above potential GDP, so it contemplates different plans to offset the effects of the surge in exports.
A. What will the government have to do to taxes (raise or lower, how much) in order to offset the effect on GDP of the surge in exports?
B. What would the government do if it wanted