If the government increases taxes while holding expenditures constant,
A)the bond supply curve will shift to the left and the equilibrium interest rate will fall.
B)the bond supply curve will shift to the right and the real interest rate will fall.
C)government borrowing will be increased.
D)the government's deficit will increase.

Question

Quizplus · Accepted Answer

When the government increases taxes while holding expenditures constant, it reduces its need to borrow because it has more revenue. This leads to a decrease in the supply of bonds, shifting the bond supply curve to the left. As a result, the equilibrium interest rate falls due to the decreased supply of bonds.

If the Government Increases Taxes While Holding Expenditures Constant