According to the traditional view of government debt (as in the IS-LM model), if taxes are cut without cutting government spending, then in the short run interest rates will ______ and investment will ______.

Question

Quizplus · Accepted Answer

When taxes are cut without cutting government spending, it leads to an increase in the budget deficit. This increases the supply of government bonds, which in turn leads to an increase in the bond yields (interest rates) to attract investors. This increase in interest rates shifts the LM curve to the left, leading to a decrease in investment.

According to the Traditional View of Government Debt (As in the IS-LM