In the classical model, a decrease in the real interest rate could be the result of a(n): (a) increase in government spending

Economics Dec 14, 2020

In the classical model, a decrease in the real interest rate could be the result of a(n):

(a) increase in government spending.

(b) increase in desired investment.

(d) decrease in taxes.

Expert Solution

In the classical model, a decrease in the real interest rate could be the result of a (c) increase in taxes.

According to classical theory, the real interest rate is influenced by the willingness of people to save and the demand for investment. An increase in business taxes will cause a reduction in potential after-tax returns and thus lead to a fall in demand for investment. The decline in demand for investment will, in turn, result in a drop in the real interest rate.

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