Suppose There Is a Reduction in Government Spending

question 53

Multiple Choice

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.

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Definitions:

Creditor

An entity (person or institution) to which money is owed.

Discounted Note

A financial instrument that is sold for less than its face value and matures at face value, resulting in a gain for the holder upon maturity.

Interest-Bearing Note

A debt instrument that requires the issuer to pay a specified interest rate to the holder until the note is repaid.

Installment Note

A financial instrument that details a loan to be repaid with interest in periodic payments over a set period.