According to the traditional view concerning government debt (as in the IS-LM model),if taxes are cut without cutting government spending,then in the short run,interest rates will ______ and investment will ______.

Question

Quizplus · Accepted Answer

According to the traditional view in the IS-LM model, cutting taxes without cutting government spending leads to an increase in government debt. This, in turn, causes an increase in demand for loanable funds, which drives up interest rates. Higher interest rates, in turn, decrease investment. Therefore, interest rates will increase, and investment will decrease.

According to the Traditional View Concerning Government Debt (As in the IS-LM