In the classical model with fixed income, a reduction in the government budget deficit will lead to a:
A) higher real interest rate.
B) lower real interest rate.
C) higher level of output.
D) lower level of output.

Question

Quizplus · Accepted Answer

In the classical model with fixed income, a reduction in the government budget deficit, often achieved by decreasing government spending or increasing taxes, leads to a decrease in demand for loanable funds. This decrease in demand results in a lower real interest rate.

In the Classical Model with Fixed Income, a Reduction in the Government