According to the model a permanent decrease in government purchases does not decrease the real interest rate according to the market clearing model because:

Question

Quizplus · Accepted Answer

In the market clearing model, a permanent decrease in government purchases would not affect either the demand for capital services or the supply of capital services. Therefore, there would be no shift in either curve causing a change in the real interest rate. Hence, option B is the correct answer.

According to the Model a Permanent Decrease in Government Purchases