Suppose the Government Is Deciding Between Either a Reduction in Income

question 33

Essay

Suppose the government is deciding between either a reduction in income taxes or an increase in government purchases.
(A)According to the spending allocation model,all else held constant,what effect will the reduction in income taxes have on the interest rate?
(B)According to the spending allocation model,all else held constant,what effect will the increase in government purchases have on the interest rate?
(C)Consider the following statement and explain whether it is correct or incorrect.Because the reduction in income taxes and the increase in government purchases have the same effect on the interest rate,the two policies have the same effect on the economy.

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