Question

Which of the following policy changes would decrease the real interest rate?

A A tax cut on interest income

B A policy that decreases government consumption expenditures

C A reduction in social security benefits

D All of the above

correct answer is D

need the explianation

Answer 1

A tax cut on interest income:

When a government cuts taxes on interest income it increases the demand for assets as well as the supply of labor. The economy has to respond by lowering interest rates & higher investments for economic growth.

A policy that decreases government consumption expenditures:

When a government decides to decrease consumption expenditure, it doesn’t have to borrow from banks & financial institutions to finance the deficit caused by increasing expenditure. Therefore the total sum of loanable money with the banks is increased. Banks have to lower the interest rates to increase the demand for loanable funds. Thus a decrease in government consumption expenditure lowers the real interest rates.

A reduction in social security benefits:

A reduction in social security benefits will decrease federal deficit & government will not raise additional monies. This will lead to lowering of real interest rates.