Consider a permanent increase in government consumption. Use the marketclearing

model to determine the effects, if any, on aggregate demand for goods ???????? , aggregate

supply of goods ???????? , and the real interest rate ???? if the permanent increase in government

consumption is financed by raising lump-sum taxes. Be sure to explain your answers.

Answer :- An increase in lump-sum tax has following impact :

1) Aggregate demand for goods Yd decreases.

2) Aggregate supply for goods Ys remain constant.

3) real interest rate increases.

Step-by-step explanation

 If the permanent increase in government consumption is financed by raising lump-sum taxes then income of the people decreases which lead to decreases in purchasing power and fall in aggregate demand but aggregate supply remain constant. A decrease in aggregate demand leads to fall in price level which decreases the inflation rate. A decrease in inflation rate increases the real interest rate because there is inverse relationship between real interest rate and inflation rate.