question archive Suppose there is a reduction in government spending
Suppose there is a reduction in government spending
Subject:EconomicsPrice:2.88 Bought3
Suppose there is a reduction in government spending. Such a fiscal policy action will cause:
a. the natural real interest rate to rise.
b. the natural real interest rate to fall.
c. ambiguous effects on the natural real interest rate.
d. no effect on the natural real interest rate.
Purchase A New Answer
Custom new solution created by our subject matter experts
GET A QUOTE
Answer Preview
- Suppose there is a reduction in government spending. Such a fiscal policy action will cause b. the natural real interest rate to fall.
In an economy, the natural real interest rate refers to the rate that is needed to stabilize the inflation or market condition. Here, the government decreases its spending, due to which there will be lesser demand for loanable funds by the government that will shift the demand curve for loanable funds to the left. As a result, the real interest rate will decrease in the market.
