Suppose there is a simultaneous tax cut and open market sale of bonds. Which of the...
Suppose there is a simultaneous tax cut and open market sale of bonds. Which of the following must occur as a result of this?
A.Output increases
B.Output decreases
C.The interest rate increases
D.The interest rate decreases
E.Both output and the interest rate increase
Homework Answers
Ans: The interest rate increase.
Explanation:
Open market sale of bond leads to decrease of money supply. When money supply decreases, the interest rate will increase. On the other hand, a tax cut may or may not lead to increase in output. Because if tax cut leads increase in aggregate demand, then output will increase. And if tax cut leads to increase in savings, output will decrease.
Thus, option [C] is correct answer.
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