If business taxes are reduced and the real interest rate increases,
A) consumption and saving will necessarily increase.
B) the level of investment spending might either increase or decrease.
C) the level of investment spending will necessarily increase.
D) the level of investment spending will necessarily decrease.

Question

Quizplus · Accepted Answer

While a reduction in business taxes may incentivize an increase in investment spending, the increase in real interest rates may counteract that effect by making borrowing more expensive, potentially leading to a decrease in investment spending. The effect on consumption and saving cannot be determined solely based on the information given.

If Business Taxes Are Reduced and the Real Interest Rate