A temporary 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 temporary decrease in government purchases does not shift the demand or supply curves for capital services. Therefore, the real interest rate remains unchanged. The fact that the supply of capital services and demand for capital services decrease about the same amount (option A) is not relevant to this specific scenario. The downward slope of the demand curve for capital services (option C) and the upward slope of the supply curve of capital services (option D) are both characteristics of the market for loanable funds, but again, they are not relevant to this specific scenario. Option B correctly explains why the real interest rate does not change.

A Temporary Decrease in Government Purchases Does Not Decrease the Real