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

Question

Quizplus · Accepted Answer

When the government increases taxes and conducts open market purchases of bonds, it reduces disposable income and increases the demand for money. This would put downward pressure on the interest rate, leading to a decrease in the interest rate. At the same time, the overall effect on aggregate demand would be contractionary, leading to a decrease in output. However, as the question asks for what "must" occur, the only option that is guaranteed is the decrease in the interest rate.

Suppose There Is a Simultaneous Tax Increase and Open Market