Holding other factors constant, if a tax increase moves the government budget from deficit to surplus, then the real interest rate will ________ and the equilibrium quantity of national saving and investment will ________.
A)increase; increase
B)decrease; decrease
C)increase; not change
D)decrease; increase

Question

Quizplus · Accepted Answer

When the government reduces its deficit it increases the supply of loanable funds to private businesses, shifting the supply of savings right. The real interest rates decrease but the quantity of national savings and investment increase.

Holding Other Factors Constant, If a Tax Increase Moves the Government