Suppose there is a decrease 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.
E) the natural real interest rate falls when the nominal rate falls.

Question

Quizplus · Accepted Answer

A decrease in government spending will lead to a decrease in aggregate demand, causing a decrease in output and inflation. This will lead to a decrease in the demand for loanable funds, causing the natural real interest rate to fall.

Suppose There Is a Decrease in Government Spending