Suppose there is a simultaneous tax decrease and open market sale of bonds. Which of the following must occur as a result of this policy mix?

Question

Quizplus · Accepted Answer

When there is a simultaneous tax decrease and open market sale of bonds, the increased supply of bonds in the market leads to a decrease in their price and an increase in the interest rate. This is because investors demand higher returns to invest in the newly issued bonds, and this increase in the interest rate will discourage borrowing and consumption, leading to a decrease in output. Therefore, the correct answer is D, as only the interest rate increases as a result of this policy mix.

Suppose There Is a Simultaneous Tax Decrease and Open Market