Suppose there is a reduction in government spending.Such a fiscal policy action will cause
A)the natural real interest rate to rise.
B)the natural real interest rate to fall.
C)ambiguous effects on the natural real interest rate.
D)no effect on the natural real interest rate.

Question

Quizplus · Accepted Answer

A reduction in government spending will lead to a decrease in the demand for goods and services, resulting in a decrease in the output level and a decrease in the demand for factors of production. The decreased demand for factors of production will lead to a decrease in their prices, thus lowering the natural real interest rate.

Suppose There Is a Reduction in Government Spending