A Tax Cut Combined with Tight Money, as Was the Case

question 55

Multiple Choice

A tax cut combined with tight money, as was the case in the United States in the early 1980s, should lead to a:

• A) rise in the real interest rate and a fall in investment.
• B) fall in the real interest rate and a rise in investment.
• C) rise in both the real interest rate and investment.
• D) fall in both the real interest rate and investment.

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Definitions:

Producer Surplus

The difference between the amount producers are willing to accept for a good or service and the actual amount they receive in the market.

Equilibrium

The state in which market supply and demand balance each other, and as a result, prices become stable.

Market

A place or system where parties engage in exchange, buying and selling goods and services.

S And D

Shorthand for Supply and Demand, the interaction between the quantity of goods offered by the market and the desires of consumers.